Within the UK there are 3 main credit reference agencies, TransUnion, Equifax and Experian. All 3 work with banks, building societies, telecom companies and other major retailers to collect and store data on you which determines your credit score. The information they store can affect your chances of being approved for credit such as a loan, credit card or mobile phone contract. Your credit score helps lenders determine if you are a high or low risk borrower and the likelihood of you repaying the amount borrowed.
What affects my Credit Score.
You may just assume that your credit rating is only affected if you miss a payment towards one of your current debts. In fact there are many factors that determine your overall credit score. Lets touch on these:
Without being registered on the electoral roll you will find it much harder to obtain credit and can greatly impact your credit score. You can register online on the gov.uk site here and usually takes just 5 minutes. https://www.gov.uk/register-to-vote
Check your credit Report.
You can access your credit report for free via sites such as www.clearscore.com or www.creditkarma.com . It is important, especially if you have recently been rejected for credit and you are not sure why, that you check your credit report for any mistakes. Errors can be made so it’s vital that all of the information on your report is correct, even a slightly wrong address can affect your overall credit score.
Unfortunately we live in a world where we do have to be aware of identity theft and this can mean that if people are able to obtain enough personal data they can take credit out in your name. Have a look at your outstanding credit commitments on your credit file and if there are any on there you do not recognise it is possible someone could have taken credit out in your name without your knowledge. If this is the case you can contact lender and credit reference agencies to get this resolved and removed.
Credit utilisation tracks how close you are to your credit limits on existing credit accounts. If you are regularly above 50% of your credit limit, this can be seen negatively when calculating your credit score. Staying below 50% of your credit limited can help improve your credit score.
Defaults and Repossessions
Having defaults (see our recent blog about defaults) or repossessions on your credit file will negatively impact your score. A default means that you have missed the equivalent of 3 or more month’s payments, implying you are a higher risk to new lenders. Repossessions will inform creditors that you were unable to pay secured debts so they good they were secured against had to be repossessed and then sold to try and recuperate some of the outstanding balance.
Hard searches on your credit file imply that you are applying for credit. Multiple hard searches within a 6 month period will have a negative impact on your credit score. If you have been rejected for credit it is best to look into why that was and work on improving your credit score than making multiple applications.
Missed payments will be reported on your credit file. It is important to maintain at least the minimum payments on time each month. You can do this by setting up Direct Debits so that you do not forget to make your payments on time. Having 3 months missed payments puts you at risk of getting a default. If you are struggling to meet your minimum repayments each month you can always seek debt advice.
If you have numerous newly opened accounts on your credit file this can also hinder your score. Having accounts open for over 12 months will look more stable to potential new lenders.
Public information such as County Court Judgements or Insolvency such as IVA’s, Bankruptcy and DRO’s will stay on your credit file for 6 years. They can cause your credit score to drop and lenders will see this as a negative factor, however the older the record the less attention lenders will pay.
It is important to remember that your credit score does not affect who YOU are as a person. If you are struggling with debts and fallen into the trap of using credit to pay credit JUST to protect your credit rating, you will only find yourself in a worst position in the long run.
If you do need advice about your debts whether you have an Excellent or Poor credit rating you can reach out to one of our friendly advisors here at The Debt Advisor on 0800 085 1825.
The Debt Advisor Ltd is regulated by The Financial Conduct Authority. This means we are able to offer debt advice and deliver both formal and informal solutions. All debt solutions need to be carefully considered and you must take independent debt advice. We hope that the information and debt advice on this site including Frequently Asked Questions, will help inform you.
There are sources of free debt advice and services. You can find out more by contacting the Money Advice Service on 0800 138 7777 or by visiting their website.