A simples guide

Your credit score explained

When you apply for credit, a lender will look at information to help them decide how likely you are to be able to repay them. This includes information you’ve provided such as your job, your income, etc. As well as whether you have borrowed credit from them in the past and how you paid this back.

Finally, they’ll draw on what is known as a credit report, which gives information about your credit history and how you have handled other loans as well confirming your identity.

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What is a credit report?

In the UK there are three established Credit Rating Agencies: Experian, Equifax and Callcredit. These companies collect information about some of your financial dealings and produce a Credit Report. Each agency produces their reports slightly differently and with a different scoring method but essentially they are all trying to do the same thing – show how likely you are to pay back a credit.

 

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What are they used for?

When you apply for credit, lenders want to make sure that you’ll be in a position to repay the money.

However, there is no magic number where you simply pass or fail. Different lenders make their decisions in different ways. Some place more emphasis on different factors compared to others. It also depends on the type of credit you’re applying for, for example they may look differently at a credit card application compared to a mortgage application.

So credit reports are important?

There’s no escaping the fact that your credit reports are important and they will be taken into account when you apply for credit, but you shouldn’t think that if you have a bad report, you’ll never get credit.

Different lenders look at reports in different ways and there are specialist lenders who look to provide credit to those with a lower credit rating or to people who’ve yet to establish a credit rating. These lenders provide lower, more manageable, limits but usually at higher interest rates (so it will cost you more) to offset the risk to them.

Your credit rating will change over time too. Things that happened a long time ago become less relevant in the context of your rating as time passes.

How do I find out what my credit score?

It’s a good idea to check your credit reports each year to find out how you’re being rated. It’s also a chance to make sure their records are up to date and that there have been no mistakes on your report, such as old addresses. It may be worth checking more than one of the three credit agencies as they calculate their scores differently, but it is not necessary to check more than one unless you think there is a problem.

Under the Consumer Credit Act, you have the right to obtain your full credit report at a cost of £2 per credit agency.

You can do this online, by post or telephone from:

CallCredit – 0870 060 1414
Consumer Services Team
PO Box 491
Leeds
LS3 1WZ

Equifax – 0844 335 0550
Equifax Credit File Advice Centre
PO Box 1140
Bradford
BD1 5US

Experian – 0800 013 88 88
Customer Support Centre
PO Box 9000
Nottingham
NG80 7WF

My credit report is poor, why?

A poor credit report can be brought about if you fail to stick to the terms of your credit agreements. For example, missing repayment dates will contribute to a poorer credit report.

If you do run into problems with repayments, it is much better to talk to the lender upfront rather than just missing payments. Being upfront may help limit some of the damage to your credit report.

In addition, being declared bankrupt, entering into an Individual Voluntary Arrangement (IVA) or having County Court Judgements (CCJ) against you can have very detrimental effects on your report.

Alternatively, you may have no credit rating yet. We all start with no credit history. If you’re at this stage, it makes it difficult for a lender to assess your risk.

I’ve been declined credit, what should I do?

First off, don’t panic. It happens. It’s a good idea to find out as much as you can as to why you were declined. Though you have no legal right to be told why, most lenders will give you a broad reason for their decision. If you think it’s unfair you may be able to produce more evidence to support your application.

Check your credit reports from the credit agencies and look at what they tell you. If the problem is obvious you may have to take the time to try and improve your rating. It’s important you don’t simply reapply as you’re likely to just make the situation worse by putting more applications on your credit report this can damage your ability to get credit further.

If you need to borrow credit, it might be worth looking into credit for people with bad credit scores. These will usually be lower amounts of credit at higher interest rates, but will allow you to gradually build your credit score. See our guide to building your credit score

Myths regarding credit scores

  • There is no such thing as a credit blacklist. It’s a term often bandied around, but it simply doesn’t exist.
  • There’s no such thing as a single credit score for you. The three agencies produce reports with different scores and lenders calculate their own based on different sources of information.
  • Credit rating agencies do not approve or deny credit applications. They simply provide information to the lender to help them make their decision.
  • If I don’t borrow, I’ll have a good score. Wrong. You need a track record of repaying debt responsibly to provide proof that you’re a good risk. Even if you have a fortune in the bank, not having any credit record will count against you.

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