Credit Scores Explained

Credit Scores Explained
June 5, 2016 Cash Lady
Credit Scores Explained

Understanding Your Credit

Why should you check your credit history?

Any time that you take out credit, it’ll show up on your credit history. Lenders look at your credit history in order to make decisions about whether or not to lend to you.

Each lender will balance up the opportunity to make profit with responsibility. The whole point of a loan is that the lender makes more money than they gave out in the first place. What they are looking for will depend on how they are looking to deal with you. They will then usually score you based on your credit record and application information. Each lender will have different criteria that they score by.

For some lenders, this will be best done by establishing a long term relationship with you, so they are more likely to be your point of contact for all your other financial dealings. After all, a lot of people stay with the same bank or credit card and use them for everything.

Other lenders won’t be looking for that long term relationship and will instead be looking to make profit on your loan on a more immediate basis. As a result, they may be more interested if you’ve actually got poorer credit, as you may not have better options.

Whatever the kind of loan you’re looking for, or the kind of lender, it’s always worth checking out your credit record. This is because you’re always going to be in a better situation if you have a stronger idea what the lender’s answer is going to be before you apply.

Since your credit history is the tool that most lenders use in order to make decisions about you, it only makes sense that you should already know what information you’re submitting to them – not least because being turned down for some applications can actually cause your credit score to go down (see below for more details about Being Rejectedand how to avoid it lowering your credit score).

By knowing your credit history in advance, as well as understanding the type of customers that lenders may be looking for, you can increase your chances of being approved for credit. You can also increase your chances of being approved at better rates than you may otherwise be.

Also, if you don’t know what’s on your credit history, you don’t know if there may be something on there that’s causing problems and that you could easily fix. You can find out more about how to Fix your Credit Score further down the page.

What shows up in your credit history?

You can view your credit history by going to a credit reporter, such as Experian, Equifax or Call Credit. These sites will generally need a subscription in order to use them, although they also often run free introductions if you sign-up. You’ll usually be automatically subscribed once the offer period is finished, so do check the terms and conditions before you sign up to anything.

If you sign up to one of these, you’ll usually be shown a credit score. This shows what the credit reporter thinks that your score will be. This does not mean that each prospective lender will score the same way, nor that they will be looking for the same kind of customer.

It’s important to check all of these areas on your full credit report, as any mistakes could lead to problems with your credit history.

Report Summary

Your report summary will show any important information first, along with the score that the credit report company shows you at. While lenders may make decisions based on this score, not every credit reporter will show the same score and not every lender will be looking for the score to be within the same parameters. This important information will include any major positive or negative factors. These negative factors usually show things like missed payments on your account.

Profile Information

This information will show your name, age, address and your last two addresses along with how long you have lived there. It’s very important to make sure that this information is correct, as this could be a major issue if not.

Account Information

This will show a summary of your various accounts. This will most typically include bank accounts, mortgages and mobile phone contracts. It will usually show the last 12 months of your balances of these accounts. It will also show whether your performance on the accounts is deemed to be satisfactory or not.

If you have missed any payments, these will show up here as well. If you owe a debt to another company (for example, a utility company), these may show up here as well. Missed payments and accounts that are deemed unsatisfactory can drive your credit score down very quickly.

Electoral Roll

This will show the addresses that you were linked to on the electoral roll. If you aren’t on the electoral roll, that’s usually an easy way to help your credit score. Also, obviously, if you aren’t on the electoral roll, you can’t vote. So that’s two good reasons.

Some people think that your address can be blacklisted, due to previous tenants. This is actually not the case – first of all, there’s no such thing as a credit blacklist, and secondly, you’ll only be linked to them if there is a financial link. Your credit rating is about you, not your housemates.

Aliases

If you’re officially known under any other names, these will show up here. This may include professional names if you’re a performer. Mistakes can occur here – one member of staff here at Cash Lady found out that they had an alias registered due to a mistake someone had made on a form somewhere, and had a registered alias as Mr Non-Applicable!

Financial Associations

This will show the details of anyone you are financially associated to. Usually this will be a spouse/partner or housemate. Business partners do not show up. If someone shows up and you don’t know who they are, you should query that immediately. In some cases, your finances maybe linked with that person, and so any issues on their report could influence yours (and vice versa).

Public Record Information

This will show any information with regards to your finances that is held in the public record. Examples of this could include:

  • County court judgements
  • Debt relief orders
  • Bankruptcies
  • Individual voluntary arrangements

These can usually cause your credit score to drop significantly. If you have something registered that you don’t know about, it’s definitely worth looking into.

Previous Searches

This section shows information about queries into your credit report that have been made in the last 12 months. These will usually coincide with applications for credit. Some of these will show up to lenders, but not all – Quotation searches, identity verification checks and similar will show up to you, but will not show up to lenders. Also, you will be able to see times when you’ve checked your own report.

Financial Associate Searches

This section shows if your credit record has been checked because of someone you are linked to. It will show who made the check along with the person you are linked to. As with the Financial Associations, if someone shows up here that you don’t recognise, you will almost certainly want to look into that.

CIFAS

Although it’s only known by CIFAS these days, the letters used to stand for Credit Industry Fraud Avoidance Service – it’s basically a record of any fraudulent activity that has taken place. Unless you have requested CIFAS to look into your account, or your employer has, or you have been the victim of identity fraud, this will usually be empty. If it isn’t (and you were expecting it to be), contact CIFAS for more information.

GAIN

GAIN is the ‘Gone Away Information Network’. Basically, this shows if there is a record for someone who has owed money and moved address without updating the person who is owed the money. This is usually taken fairly seriously, so it’s important to make sure you update any companies you owe money to (especially if it’s a significant amount), or they may think you’ve ‘done a runner’.

Many bank cards

Being Rejected for Credit?

If you are rejected for credit, it’s a good idea to review your credit score to see if you can figure out why, especially if it’s something you thought you would easily be approved for.

A lot of people make the mistake of immediately applying again, which sometimes actually causes further problems. Some lender’s decisions will be recorded on your credit report, so if that lender rejects your application multiple times, it’s compounding the issue by showing multiple rejections on your credit report instead of just one. Also, if you apply multiple times in a short amount of time, it can make you look like you rather desperately need money, which can be something which lenders may take as being a sign of bad financial management.

Instead, it’s worth looking to see what information is on your credit record, as it could simply be that some inaccurate information has been recorded somewhere. If it has been, you can usually get this fixed, or at least have a notice of correction added to your credit record (see Mistakes on your Credit Report).

Unfortunately, this can take time. And even if it is changed, it may not be a good idea to apply again immediately, especially if you’ve made multiple applications recently. If you do, it could still be seen as a sign of desperation and bad financial management – it’s frustrating, but sometimes, the best thing to do in these situations is to wait, especially if you’re looking for the best rates.

If you’re looking for emergency cash, you still may be able to apply via some lenders, however the rates are likely to be less good. Payday loans for bad credit, some short term personal loans, lines of credit and poor-credit credit cards are all types of loans that are aimed at people with lower credit scores. Because of the higher risk involved for the lender (and also because of the shorter length of time the loan is usually for), they tend to be more expensive than longer-term loans. Used appropriately, though, they could be a better option than picking up fines or extra charges. Also worth looking at payday loans no credit checks alternatives.

Fix your Credit Score

If your credit score is poor, it’s likely to be for one of three reasons.

  1. A lack of credit history
  2. Mistakes on your credit report
  3. Financial mismanagement

1 – A lack of credit history

Did you know that you can essentially be absolutely perfect with your finances, but still end up having a relatively low credit score?

Your credit record doesn’t just show how good you are financially. It also shows how you’ve used credit in the past. And if, for various reasons, you’ve just never had to use much credit, then there won’t be any information to go on for lenders.

Also, most credit providers are looking to make a profit in the long run. If you’re good with finances, you may actually be less attractive to some lenders. For example, if you transfer your credit card balance a number of times to take advantage of zero percent offers, you’ll save money, but lenders will be able to see that you’ve done it, and may not see you as a ‘good bet’.

If you don’t much credit in your history, it may be worth actually taking some out in order to build up a history for yourself. If you take out a credit card, for example, while repaying it each month, it’ll help show you as someone that can use credit sensibly. A loan or credit card that is well managed can usually be better for your credit score than never having taken out any credit.

2 – Mistakes on your credit report

Mistakes can, and do, sometimes happen. People can fill in forms incorrectly, databases can get mixed up, and human error does happen from time to time. If you have a name that is relatively common, it can also be all too easy to end up with crossed wires when it comes to your credit report.

Your credit report will show the information that is held about you, so if you spot something that shouldn’t be on there, it’s worth taking the time to try to fix.

If you dispute the information held, the first thing to do is to find out who owns the information. If it’s information about, say, utility bills connected to a house for a period of time after you lived there, you can contact the utility company to clarify the situation.

You can approach it however you wish, however most places tend to respond better to polite requests rather than angry demands (although, at the same time, angry demands do get results at times as well, let’s face it). It’s usually worth putting these things in writing, however, as this can lead to a better result than trying to deal with it over the phone – even if it does take longer.

Going back to our example of utility bills, it’s worth explaining clearly when you moved away from that address and what steps you took to ensure that all bills were settled. You can request a copy of the bill. If it is your mistake, and you acknowledge that, you can offer to settle the account, requesting that the debt is removed from your credit record when you do. If it isn’t your mistake, make clear that you would like them to remove the debt from your account, as it is for the wrong person.

The steps are roughly the same for any occurrence of a mistake.

1 – Identify the owner.

2 – Contact them and explain the mistake. Request that they amend the mistake on your credit record as soon as possible.

3 – Add a notice of correction to your credit report in the meantime, to state that it is a mistake and that you have contacted the company involved.

4 – If you don’t hear back from the company after a couple of weeks, repeat step 2, but more firmly.

5 – If this is not sorted to your satisfaction, contact the financial ombudsman, as they are able to act as arbitrators in some cases.

Usually, mistakes can be rectified reasonably quickly, but if it turns into a dispute, it may be worth contacting your local citizen’s advice bureau.

Be aware that even if the company responds promptly and agrees to remove the mistake, it can still take time to actually show up on your credit report. In many cases, it won’t show up until around a month has passed, as that’s when most banks tend to run their monthly credit reports.

3 – Financial mismanagement

Sometimes, finances can go wrong, and trying to keep afloat can cause problems with your credit rating. Periods out of work, difficult personal times, long-term illnesses… all are times when many people end up using up their available credit.

Once you’re back on fairly level ground in terms of income, your credit record could still look poor. If you’re in a position to fix it, you can end up having fairly major improvements within months.

Firstly, it’s important to make sure you’re up to date on everything. Use your credit report to check if you have any outstanding debts. If you do, arrange to pay them off, either immediately or in instalments.

It’s massively important to keep up to date with regular payments as this is the simplest way to help your credit rating. Missed payments are generally seen as a negative, especially if they’re recent. When you look at the Accounts Information section of your credit report, it’ll show the last year’s worth of your payments to accounts. It will also show whether the account is currently outstanding or not.

You should aim for all the accounts to be either ‘settled’ or ‘satisfactory’. A ‘settled’ account is one that is now closed, whereas a ‘satisfactory’ one is a paid-and-up-to-date account. If you are not up to date, it’ll show as either ‘outstanding’ or ‘unsatisfactory’.

The more times you miss payments, the more they’ll damage your credit score for most lenders. The more you keep up to date with them, they’ll become less of an issue by the month. If you haven’t already set up these accounts to be paid by direct debit, it’s worth doing so, as this means that you’re less likely to forget about them. At the very least, if you can’t repay your entire credit card bill, make sure you make regular repayments.

It’s also worth bearing in mind that the more you’re repaying, the more likely companies are to listen if you try to negotiate with them about removing previous issues on your credit report. There’s never a guarantee with these things, but if you’re making regular payments, it never hurts to ask.

Also, make sure that there aren’t any mistakes on your credit record. This can usually be fixed fairly easily if there are. Put a note of correction on the record while you contact the owner of the information (as above).

It’s not quick, but it can be effective. It’s obviously frustrating when you’re trying to apply if you can’t get somewhere, but that’s why it’s worth looking into during times when things are going better. Each small step helps in the long run, and credit records build up over time. It may not be an immediate solution, but the more time you’re good with your finances, the more your credit record will reflect this.

The more debt you can pay off, the better, for multiple reasons. One of them is that the extra available cash will help avoid emergency situations in future. The other is that one of the things your credit score can be based on is your usage of credit.

If you use all your available credit (by maxing out your credit card(s) or constantly keeping your account at the limit of your overdraft), then you’ll be seen as taking less of a responsible approach to your finances. If you pay off your credit card regularly, and don’t spend all your time in your overdraft, you’ll be in a much better position. Even if you slowly repay your credit card over time, each time it improves, you’ll likely see an incremental increase in your credit score from the credit recorder as well.

Good Credit Behaviour

If you want to make sure you have a good credit history and are likely to have a good credit score from most lenders, you will need to make sure that you keep an eye on your credit record. You can also bear a few simple points in mind which should help in the long run.

The more stable you are, the less of a risk you will be. If you’ve been moving house regularly for some time, you may be seen as someone who is more of a risk, as you may be difficult to contact. Also, if you’re constantly changing mobile plans, credit cards, bank accounts, etcetera, you may be seen as someone that it is difficult to form a financial relationship with. In situations like this, some lenders may not want to lend to you, even if you’re good with money.

The longer you stay in the same house, the longer you keep the same bank accounts, mortgage, etc, the more likely you will be to be seen as a safe, responsible pair of hands that a lender will be comfortable dealing with.

Cancel cards that you’re not using, because they can be a fraud risk. Also, it can just show up as another account that isn’t actually necessary any more. While it can be reassuring to know that you have the account or credit available should you need it, it may be better for your credit history to close it.

When you make applications with anyone, you can usually request that they perform quotation searches rather than full searches. This prevents them from showing up on your credit record in any meaningful way. Usually, you’ll still be able to see if they’ve searched your record, but it won’t show up to anyone else who searches you. Whereas if you’ve applied to lots of lenders, and they all do full searches, it may seem as if you’re definitely in need of money – this can sometimes raise alarm bells, especially if you’re turned down each time.

Make sure you make your payments on time, as this will usually be the surest way to build a strong credit rating on time. Nobody likes to deal with someone who keeps them waiting when they are owed money.

Double check who you are linked to with joint accounts. It’s worth remembering that your finances may be affected if you are linked with someone with bad finances – this isn’t a suggestion to break up with anyone, but it may be worth maintaining separate bank accounts for a while longer.

Finally, check your credit report regularly – it’s the quickest way to find out about any errors that could be causing problems. Also, you may find out about debts you’re not aware of – if you’ve moved house, and forgotten to cancel a bill, you could be racking up default notices without even being aware of it.

It’s simple to check your credit record. Check the various companies to see which one appeals the most – they vary in terms of charges and the information that they provide, but it’s worth doing every now and then.