Your credit score is an indication of your financial behaviour, which lenders scrutinise every time you apply for credit in any form.
Your credit score will either unlock access to the cards, loans, and mortgages that you want – or keep them forever out of reach. But what is your credit score, how is it calculated, and what can you do to ensure your credit score presents you in the most favourable light?
What is a credit score?
Whilst the words “credit score” and “credit rating” are regularly used in regard to assessing creditworthiness, what is really meant here is simply a record of your credit history – all the recorded personal and financial records about you and your past behaviour with credit for your credit file.
There are three credit reference agencies (CRAs) that each record your same credit history, but each scores you differently:
- Experian scores you out of 999
- Equifax scores you out of 700
- TransUnion scores you out of 710
So, there is no one single magic number that represents your credit score by which all credit issuers can assess your risk as a borrower. That said, the higher the score (with all three CRAs) the better your creditworthiness and the more likely you are to be approved for a credit product.
To further complicate matters, although credit scores are undoubtedly a very useful guide for consumers themselves, lenders do not see the actual scores you do when assessing applications.
Instead, they apply their own unique algorithms to this data, the weighting and significance of which differs from supplier to supplier. The exact details of these algorithms are their most valuable trade secrets – the secret sauce upon which their business models are built.
How do lenders assess my credit application?
Credit issuers consider and assess a broad set of variables when you apply for credit:
When applying for any form of credit, you will need to fill out an application form either online, on paper and posted, or at a bank branch.
The specific information requested will depend on the type of credit you are applying for, but typically it will be things like:
- Full name, including any previous names
- Current address, and any previous addresses within the last three years
- Date of birth
- Contact details
- Employment status and income
- Residential status
- Other credit commitments, such as credit cards, loans, mobile phones, etc.
It is crucial that the information you provide is 100% accurate and complete. If the credit issuer finds any anomalies when comparing against official records (like the electoral roll), your application will be rejected immediately.
The decision to reject your application at this stage is not always because the issuers think you are a bad risk, but they themselves have a legal obligation to ensure that all fraud and money laundering regulations are strictly adhered to, and confirming that you are who you say you are is very much a part of that process.
Credit reference agencies
The three main credit reference agencies in the UK, Equifax, Experian and TransUnion each hold personal information about you and your credit behaviour over the past six years:
Personal details are obtained from electoral roll records, which include your full name, date of birth, address, how long you have lived at that address, the full name of anyone else you live with and your eligibility to vote in the UK.
This is information on any person you have had a shared financial responsibility with (for example a loan with a partner or friend).
If the perceived creditworthiness of that partner or friend is poor, this could have a detrimental effect on yours when you come to apply for credit. It is notable here that this rarely works in reverse – if your friend or partner has a better credit rating than you, yours is not likely to be improved because of that association.
It is therefore important to think very carefully about who you take out a joint credit product with.
Other lenders’ searches
This is a record of other credit issuers who have searched your credit file in the past six years – each search is documented as an “inquiry”. This information is retained because if you have made multiple credit applications in a short space of time, it could indicate to issuers that you are either desperate for credit, or have been turned down for it in the past.
Annoyingly, your file does not show whether or not you were actually accepted for a credit product. So, an acceptance will not boost your score, but on the flip side, a rejection will not directly lower your score either. The impact comes from applying for more credit (most likely following a rejection).
You can prevent these searches from appearing on your credit file by using an eligibility checker when applying for credit, where only a “soft search” – which leaves no mark on your credit file – is used by issuers to ascertain the likelihood of your being accepted for credit before you go ahead with your application.
Bankruptcy/County Court Judgments (CCJs)/Court Notices
Any bankruptcy/Individual Voluntary Arrangement (IVA) filings or court actions are a matter of public record – the Insolvency Register, and the Register of Judgments, Orders and Fines respectively – and credit reference agencies store all this information too.
It is important to note that if you have undergone some form of court action such as bankruptcy or an IVA more than six years ago, it is always advisable to check with all three credit reference agencies that it has been removed completely from your file. It isn’t always an automatic process.
Any recorded fraudulent activity in regard to finances is cited here.
Previous credit behaviour
This is information provided by banks and other lending institutions about your current and previous behaviour in relation to credit. It includes loans, credit cards, mortgages and store credit, plus your history of repaying such credit – whether these have been paid on time, or if you have had any late, missed or defaulted payments.
How do I find my credit file?
Before applying for any credit whatsoever, it is always advisable to check your credit file, so that you can see what the credit issuer will see, and to ensure that all the information retained on your record is correct and up to date.
There are a number of ways of obtaining your credit file. You can apply to each of the credit reference agencies independently and request a Statutory Credit Report, which they are obliged to send you. This used to cost £2, but since the introduction of new GDPR rules, it is now free.
You can view your full credit file for free from all three agencies. The paid-for services usually start charging you after a free trial period typically of 14 or 30 days – if you do not want to carry on after this, be sure to cancel your subscription.
Although both the free and subscription services show you the same information, the former is only updated on a monthly basis, whereas the latter will be fully up to date.
If you find incorrect information in your file, you should immediately contact the CRA to ask for it to be corrected and inform them of any suspected identity theft, if you think that might be the case. You should also check your file with the other agencies to see if they need to be corrected.
Remember that all applications for credit are initially assessed on the information you provide in your application form, plus the information that can be obtained from credit reference agencies.
Ensure that everything is in order before you apply for any kind of credit (and where possible undergo a soft search eligibility check first to avoid leaving “footprints” on your credit file) and you should give yourself the best possible chance of success.
Edited by: Sarah Guershon
Image credit: Chad Madden/Unsplash