Understanding Your Credit Score, Credit Rating And Credit History

The 2021 Credit Score Guide – Chapter Two

In this chapter, we give an in-depth explanation of credit scores, credit ratings and what data your credit file contains. Understanding these key aspects will help you know what you need to improve so that you can maintain access to financial products, even during recessions and economic downturns.

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Article Highlights:

Despite the fact that credit reference agencies have been a part of our lives for over two decades, there’s still confusion about the difference between your credit score and your credit rating. With 15 million Britons never having checked their credit file, there are also misunderstandings about what information lenders are interested in when they consult your credit history. In this article, we set the record straight.

Your credit score – Not a magical number

Some consumers think of their credit score as a ‘magical’ number with the power to open the door to all lines of credit. However, it isn’t as simple as that.

First of all, the 3 main credit reference agencies in the UK evaluate your credit score in different ways. For Experian any score over 700 is considered ‘good’ (with a score over 800 classified as ‘excellent’); Equifax specify that a good score is one over 660 while TransUnion give a rating between 0 and 710.

Differences in your credit scores from these credit reference agencies is because they don’t have access to exactly the same data about you. This is because different lenders and credit providers might not work with the same agencies.

Another thing to bear in mind is that your credit score isn’t set in stone. It goes up and down as a result of your money management. For example, if you delay in making a payment (whether this is your fault or not), this will have a knock-on effect on your credit score. Information on your credit file is updated regularly (about every 4-6 weeks) and this is when you might see it rise or fall.

Information about your credit score is updated every 4-6 weeks

The difference between your credit score and credit rating

Your credit score gives you a numerical value while your credit rating puts you in bands from ‘poor’ to ‘excellent’. However, both have the same purpose; they are tools to judge your creditworthiness and what type of borrower you are. Above all, they’re factors in risk management so lenders can evaluate how likely you are to repay the money.

Your credit score/rating is just one of the factors that lenders take into account before making a decision about approving your access to a financial product. Without a decent score, you’ll less likely to be given a loan, credit card or a get approved for a mortgage to give just a few examples. However, just because you have a good credit rating, this doesn’t automatically mean that credit will be approved. Lenders take other factors into account. What are these other factors?

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Other factors considered by creditors besides your credit score

  1. The first is the application you fill in. You should make sure that all information is accurate especially about your salary, employment history and assets. Lenders will check that all data is correct and any inconsistencies can lead to your application being rejected. You can read more on what to do if you’ve been declined for a loan here.
  2. Job/Life stability is considered as well. Lenders are more likely to approve credit if you can show signs of stability. For instance, working for the same employer for a longer period of time or living at the same address.
  3. Another factor is any previous history you’ve had with the lender. Their financial records (of previous loans for example) can tell them a lot about what kind of borrower you are and how great a risk you represent.
  4. Finally, your affordability is a crucial element. Even with the most perfect credit score, no lender will consider approving you if you cannot afford the product they’re offering.

Although lots of consumers see their credit score in terms of whether their credit application is approved or denied, it can affect your access to credit in other ways. Your credit rating can play a role in how much credit you’re allowed and also the interest rate you’re offered. When shopping around for credit, you probably compare the size of the APR. However, by law lenders only have to offer this rate to 51% of borrowers. If your credit score is lower, you’ll be charged more to borrow money because you represent a greater risk. In effect, a low credit rating can cost you money.

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Your credit report – What information does it contain?

The data in your credit file builds up a picture of your money management skills and your past credit history. Lenders are more likely to approve credit for someone who is reliable, stable and has managed to tavoid accruing debt. Therefore, when they access your credit file, they’re interested in all aspects but will look at key areas. What do they focus on?

  • Available credit and payments

    When consulting your credit report, lenders will look at your credit accounts, the date when they were opened, the credit limits and any missed payments or defaults. This will give them an idea of how you manage your money and how much you owe. Can you afford to take on more debt?

  • Signs of struggling to make ends meet

    Another aspect they’ll look at is whether you show signs of struggling to manage on your salary. Taking credit card cash advances, using payday loans (even if they’re paid off in time) and only making minimum payments are all warning signs for lenders that you’re having problems.

  • Number of credit searches

    Your credit report will list all credit searches. When there are many applications in a relatively short period of time, this can give the impression that you’re desperate to borrow money and would make you a high-risk borrower.

  • Public records

    Being on the electoral roll shows proof of your residence. Lenders will also look at a history of IVAs, County Court Judgments and/or bankruptcies. (Want to learn more about IVAs? Check out our full guide here).

  • Financial associates

    If you share a financial product with someone else (such as a shared bank account), borrowers will look at the other person’s credit file as well. This is because your finances are linked with theirs and could have an impact on your ability to repay.

By law, lenders only have to offer their advertised APR to 51% of borrowers

By law, lenders only have to offer their advertised APR to 51% of borrowers

Conclusions about your credit score, credit rating and credit history

Knowing how data is compiled in your credit report and the effects of a good credit score/rating can help you a great deal. Not only can it ensure that you can keep and/or build up a good credit score but it will improve your chances of accessing credit. Finally, it can give you better terms and save you money.

FAQs about credit reports:

What does a full credit report include?

A full credit report includes your personal information. This would be your full name, current and previous addresses, you employer information (if available), loan and credit card payments, credit inquiries, collection records, as well as public records, in the event of bankruptcy filings.

Do credit checks affect your credit score?

Credit checks performed at the time of your application for a loan or other financial products can have an effect on your credit score, especially if there are numerous credit inquiries in a short time frame. Lenders normally need to access your credit report in order to be advised about your financial situation. However, they do not only take into account what your credit report states, as in most cases they also take into account your personal circumstances. If you wish to check your own credit report, this would not negatively impact your credit score.

Can you get a credit report if you have no credit history?

In the event that you have not credit accounts, or have accounts with lenders who do not report payments to credit reference agencies, then you will have no credit report. If you wish to check whether your credit report is available to you, you can request a credit report from the three credit reference agencies which operate in the UK: Experian, Equifax and TransUnion.

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