The Truth about Credit Scoring
Are you considering applying for a mortgage but worried that past financial misdemeanours might scupper your chances?
Maybe you have been turned down for credit and cannot fathom the reason? Or, perhaps you want to find out if any fraud has been committed in your name.
Either way, there is one place you can get to the bottom of these conundrums and that is by obtaining your credit file.
The problem is there are so many myths and misconceptions flying around about how your credit record can be tainted and what constitutes a squeaky clean file that it's hardly surprising many of us are reluctant to dig too deep.
Uncovering some gruesome financial blip we'd swept under the carpet in the past makes reading our credit reports about as enjoyable as opening our exam results.
In a bid to uncover the truth about these reports, Kate Saines of Myfinances.co.uk has interviewed the top people at three of the biggest credit reference agencies (CRAs) - Experian, Equifax and Callcredit. We wanted to find out how the scoring system works and to explode some of the myths surrounding them.
As well as giving us the lowdown, all three companies were keen to stress one particular point. And that that is every lender has a different set of criteria or credit scoring model.
The agencies provide them with your profile, and it is then up to the lender to make a decision based on their own set of requirements.
You may find one lender will bite your hand off for your custom while another will shut the door in your face.
However, we were keen to find out a bit more so we put the following questions to the agencies.
Will I lose points on my credit record every time a search is made?
Not necessarily. Although every search on your file leaves what is known as a 'footprint' this will only be detrimental if lots of searches are made in a short period of time. A barrage of searches might suggest you are desperate, says Experian, or that a fraud is being planned.
Tip: If you are just shopping around for credit and not necessarily intending to apply for a particular deal, ask lenders to make a 'quotation' or 'enquiry' search. This will only leave a 'soft footprint' so will not make a mark on your file like a 'hard footprint' which would be noted on your file if you make a full application for credit.
Neil Munroe, external affairs director of Equifax, says: "Enquiry search footprints have no impact on credit scores as they are not visible to other lenders making subsequent searches - just to the Credit Reference Agencies and the individual."
Will checking my own credit report leave a 'black mark'?
According to Experian, checking your report will only leave a 'soft footprint', and it is only a 'hard' footprint that affects your credit score.
What if I've made one late payment to a lender by accident?
This will negatively affect your credit record. All three CRAs said this will alert a lender to the fact you may potentially struggle to meet your financial responsibilities in future.
James Jones, consumer education manager at Experian, says: "In special circumstances, explain your problems - for example you suffered a serious illness - you can add a note to your credit report."
Tip: Set up direct debits for the minimum amount on all your credit agreements to ensure you never miss payments.
What if I have never had a credit card or loan? Will this make me less credit-worthy?
It will not make you less credit-worthy but gives nothing for lenders to go on when deciding whether or not you have the ability to make payments on time.
Tip: Neil Munroe of Equifax, says: "It's worth considering opening an account to establish a credit history - even if you pay it off in full at the end of every month."
Do student loans show up on your credit file?
Some student loans will show up and others won't. According to Experian, loans administered by the Student Loans Company are not generally shown on credit reports.
Old-style loans taken out before 1998 and where the borrower has defaulted on payments could appear, however.
Tip: Callcredit suggests that for more information, students should contact their lender.
Will it show up on my record if I accidentally go over my overdraft limit and receive a fine from my bank?
Yes. Your overdraft limit and balance appear on your credit file. Experian said customers who misuse their overdraft will find negative information appearing on their report.
However, the details of the penalties you receive for doing so will not be specified. And Callcredit said the exact circumstances of each case may be taken into consideration. Mark Ward, head of consumer services at Callcredit, says: "In some cases banks may grant some degree of forbearance."
Tip: If this was a one off and there was a good reason for it, placing a Notice of Correction on your credit file, explaining the background to any arrears will give the lender more information to go on when making their decision.
Will applying for credit and therefore going through a credit check expose me to credit fraud?
No, we were informed by the CRAs that information is passed securely between them and the lenders.
Tip: Equifax recommends if you are no longer using a credit card to close the account to limit the chances of falling victim to fraud if you lose, or someone steals, your card.
Experian said obtaining your credit report can help you prevent fraud and doing this before applying for credit can help to ensure everything is accurate and up to date.
Is it true that moving home too frequently can affect your file?
Again, this varies from lender to lender. However, in general, most lenders like to know where you are living now and where you have been based in the past. So it is important you are always registered on the electoral register.
Experian says lenders like to see stability. James Jones says: "It's fair to say that most lenders will class someone who moves home frequently as more of a credit risk than someone who has lived at the same address for ten years."
Tip: Make sure you put yourself on the electoral register every time you move house.
Will I be tainted by the credit history of anyone who has shared my address?
No. According to James Jones of Experian, it is a common misconception that credit reports relate to previous occupants of a property.
He adds: "These days it makes no difference to your credit rating if the previous occupant of your home was a millionaire or a bankrupt as long as you never shared a financial connection.
"Lenders are only interested in your ability to repay them on time and in full."
Is being married/being older an advantage when applying for credit?
There is no general rule among lenders which states that being older or being married will make you more creditworthy.
According to Callcredit, if you are financially associated with someone who has a positive credit score this can be an advantage when applying for credit.
But, as Experian points out, this works the other way too. If you are linked to someone who has bad financial habits it can damage your rating.
Just making one joint application for credit can financially link you to someone, even if the account is closed or never actually opens.
James Jones of Experian, says: "This financial association can damage your credit rating long term if you do not remove it."
Tip: Neil Munroe of Equifax adds: "If a relationship ends, it is important that you ensure all joint financial agreements are closed, otherwise any detrimental credit behaviour of the ex-partner could affect your ability to get credit in the future."
If you have a bad credit record, how long before the slate is 'wiped clean'?
Credit agreements stay on your file for six years from the day they are settled. If you have been made bankrupt or received a County Court Judgement (CCJ) against you, this will also remain on your file for six years.
Missed repayments stay on your credit report for at least three years.
Equifax said if a long stretch of time has passed since a late or non payment and there has been a good track record ever since, lenders will look more favourably upon an application.
Tip: Neil Munroe of Equifax says: "If you have missed payments or defaulted on an account you can add a Notice of Correction to your credit file. This is a 200 word statement to explain the circumstances of the late payment, such as loss of job or illness."
All lenders you apply to in the future will be required to read this statement.
Can I amend my credit record if I think it is wrong?
Yes. Equifax says if you think a lender or company has provided incorrect information on your credit file you can raise a Notice of Dispute with the CRA and they will take it up with the lender. This takes a maximum of 28 days to resolve.
What else can I do to improve my credit rating?
If you had a CCJ, and it has been settled, ensure this is recorded on your credit file, says Equifax's Neil Munroe.
He also urges anyone who has been refused credit to immediately obtain their credit file to find out why but - more importantly - not to apply elsewhere. Otherwise you could leave too many 'footprints' and damage your file.
And avoid having a balance that is more than 30 % of your credit limit as this will be considered as excessive debt by lenders, he said.
Callcredit's Mark Ward recommends paying all bills on time - even if you only make the minimum payment. He adds: "If you are struggling to pay any of your bills, we would advise that you should get in touch with your lender as soon as possible as they may be able to help you develop a payment plan."
Close down any accounts you don't use as dormant accounts can affect your credit score.
Meanwhile, if you can pay off any loans or credit agreements ahead of time this will be looked on favourably.
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