Demystifying Your Credit Rating
The first fact to demystify is that you have a ‘credit rating’, you don’t. In the US people can have a set ‘credit rating’, however in the UK it is not the case. There is no standardised or single rating system.
Whenever this is explained people often quote a 999 score on Experian or another score from another ratings company. This is a guide, a simple way to reflect recent events that the credit company is aware of.
The UK has three credit reference agencies (note the word reference not rating) being Experian, Equifax and Callcredit. A lender will refer to at least one of these when looking to advance finance, which one largely depends on who they prefer, who is in favour and who is the most economical to use.
So, after saying there is no such thing as a credit rating, then let’s demystify what lenders do and why you think that a credit rating is important, let’s also crack the myth around having a good score and still not getting approved, read on…
What Lenders Do
The easiest way to understand this is to ask yourself why lenders lend money. The answer you should come to is profit. They lend for profit and for no other reason. Each lender wraps things up differently, but underneath it all it comes down to profit.
Lenders will generally do three things. They will look at;
- What they know about you already
- What the credit reference agency says
- What you put on your application form
Based on the above they will make a decision whether they can lend to you or not. For this part, read ‘can’ and not ‘want’, it is a critical difference that we will come on to.
Can Lend or Want To Lend?
Ask yourself why a lender advertises a particular product. The best example here is a credit card with an interest free offer. Why are the credit card company offering you free money? The reason is the same as why Tesco or Sainsburys have a loss leader, it is to get you in the store where they can cross-sell and up-sell, where they can make more money out of you as a customer.
Let’s say that a particular bank wants to grow it’s mortgage book. They offer an interest free credit card to new customers only, this increases their client base and allows them to promote their mortgage products to a trusted customer base. They can test trust through how you conduct your credit card, they can learn about you and market to you much easier.
This is where having a good credit history can mean absolutely nothing, here’s why…
You may have a superb credit history but get turned down for your credit card simply because the lender wants to gain potential mortgage customers but you don’t match the profile as someone who will want a mortgage.
This is where people with good credit records can be confused. It is not all about risk, it is about profit and underlying aim. If you have been declined don’t think that your credit is bad, it may be that you simply don’t fit what the lender wants.
How To Improve Your Credit Rating?
OK, the term rating is still being used, I know it doesn’t really exist… What this refers to is the information held by a credit reference agency. Generally there are a few good practice things that can make a difference;
- If you have a credit card then always set up a minimum payment direct debit. Whether you pay it all back each month or not, servicing your debt sets a good record
- Keep an eye on things. Every now and again get hold of your credit report and make sure it all looks correct
- Be aware of your partner. Most couples will have some form of joint financial arrangement, this means that their past finance conduct has a direct impact on you
- Separate yourself from others if in shared accommodation. With the above in mind, make sure the credit reference agencies know you have nothing to do with people you live with. This matters with things like student houses, rented rooms or if you have a lodger. You can tell the credit reference agencies that you are not connected, but you do need to tell them
All the above is about trying to demystify credit reports and credit ratings, if you ever have a credit report and don’t really understand it then get in touch and we will try and shed some light on things.
By Dave Farmer
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