Checking your credit record in a credit crunch
As lenders tighten their conditions, only those with the best credit histories are likely to be accepted for a loan.
Meanwhile, the financial regulator has warned the credit crunch could lead to a rise in fraud.
In other words, there has never been a better time to check your own credit report.
Sarah Routledge asks exactly how lenders judge someone to be creditworthy, and how to improve your standing.
There are three main credit reference agencies that keep information on your financial history: Experian, Callcredit and Equifax.
Whenever you apply for credit, the lender will contact one of these agencies to view your file to help make a decision on whether to lend to you, and on what terms.
"Lenders typically take three sources into account. The information you give them on your application, they may have internal records if you have been with them before, and your credit report," explains James Jones, spokesperson for Experian.
What is on my report?
Your credit record will show if you are on the Electoral Roll, if you have had any County Court Judgements (CCJs) or if there are any records of bankruptcy against you.
It will also show details of any credit agreements you have had, going back six years, including how much credit is currently available to you and whether you have missed any payments.
In addition, it will show if any other credit checks have been performed in the last year.
And although you are no longer judged on your address, you can still be financially linked to someone, for example if you have ever applied for a joint mortgage or bank account.
Lenders all have their own system for working out a credit score and they tend to keep their methods a secret.
However, the information held by credit reference agencies will make up an important part of the process, and consumers have a right to see their own record.
Why should I check it?
"It's really worth checking from time to time," says Mr Jones.
"Increasingly, lenders are using credit scoring not only to accept your application but also to set credit limits and interest rates on an ongoing basis."
If a lender believes you are overstretched, or have become a risk, you may find your credit card APR is raised, or your credit limit lowered.
So even if you are not intending to apply for more credit, this is a good reason to make sure everything on your record is correct and your credit history is as good as possible.
Another good reason to keep and eye on your credit report is if you suspect you may have been the victim of a fraud.
Cifas, the fraud prevention service, reported a 16 per cent increase in fraud in 2008.
The group believes increasingly stringent lending criteria means fraudsters are on the lookout for people with clean credit records, whose name they can then apply for credit in.
"If you disagree with anything on there, you should get back in touch with the credit reference agency to point out what your concerns are. You have a legal right to have your dispute answered in 28 days and they will go off and check it out for you.
"If you do suspect identity fraud, it might be a good idea to check your file with all three agencies, but if it is just out of curiosity then just one will do," Mr Jones advises.
What factors affect my score?
"The main things a lender would look for is whether you are on the electoral roll, so they can see if you are registered at the address you have given and whether you are keeping up on your repayments," says Mark Ward, head of consumer services for Call Credit.
He adds: "Also, one thing that is becoming increasingly common is people who have several accounts open and not using them. This can affect your credit score because lenders see you have a lot of credit available, even when you are not using it."
Call Credit recommends checking your credit report as a way of seeing all your finances in one place. If you have several credit cards and loans that you are not using, you could improve your score by cancelling a few, lowering the amount of available credit.
"Another thing we recommend is not to make too many applications in a short space of time," Mr Ward adds.
Many people do not realise that every time they apply for credit, there report is searched - and the search is logged.
If you then do not open an account with the company that has performed the search, other lenders will see this and assume you were turned down for credit, making them more likely to turn you down too.
So if you have been turned down, it is important not to immediately start applying for more credit as this could damage your score.
While too much credit will negatively affect your score, so too could no credit at all. Lenders like to see a record of regular payments being made on accounts, so if you have no active accounts at all this could also lower your score slightly.
How can I improve my score?
The first thing to do is get a copy of your credit report from one of the three agencies: Callcredit, Experian or Equifax.
"You can apply for it in the post, or over the internet. There is the basic credit report that costs £2, and this is often known as the statutory report, which you can get through the post.
"Or you could pay for a more detailed report, which would include your credit rating," explains Equifax's external affairs director Neil Munroe.
Experian and Equifax both offer a free 30-day trial period in which you can view your report, although after this time you will be charged a monthly fee unless you cancel.
Callcredit offers unlimited viewings of your report for a monthly fee, and is offering to send your credit score once a month for the first three months, for free, as part of the package.
All of the agencies will send you your basic report in the post for £2.
Once you have your report, check all the details about you are correct. If there are any entries you are unhappy about, contact the agency who sent you the file and ask it to investigate.
"We will raise the dispute with the lender," says Mr Munroe.
"They may come back and say the entry is right, but you still have the right to put a statement on your file up to 200 words, so other lenders looking at your report can see why you have missed a payment."
A statement of explanation, such as losing your job, illness or a relationship breakdown could help reassure a potential lender that a missed payment was a one-off.
Alternatively, if the information is wrong, the credit reference agency can correct it.
If your account registers credit taken out in your name that you are unaware of, you may have been the victim of identity fraud. In this case, contact the credit reference agency.
"We would share this information with the other bureaux and you can your report from all three agencies, as the fraud may show up on one but not the others. Then we all work together to resolve this with the individual," Mr Munroe adds.
"The lender will be told of the fraud, and the data removed from the file."
If your report shows a low credit score because of problems with debt, you can start to rebuild your rating.
"If there are any blips and they are factual, it is best to make all your payments on time and settle some accounts. The more recent, good payments you have, the better you will look to lenders."
Repairing your credit rating will take time, but lenders look favourably on attempts to make payments on time and will take this into account.
You can also build up your credit rating by taking out a credit card and paying it off in full every month - there are several providers who are willing to accept applicants who are refused elsewhere.
However, it is best not to have too many credit card accounts open at once, so if you are trying this tactic, settle one of your other accounts first.
Brad King, managing director of compareandsave.com, says: "Credit building cards generally have a higher APR than other credit cards, however as long as they are managed properly and monthly repayments are always made, they provide people with a way of regaining a good credit score."
Credit building cards include Vanquis Visa, Capital One, Aqua, and Cashplus Prepaid card with 'credit builder'.
Repairing your credit will take time, but by taking some basic steps and some advice from a credit reference agency, it is possible.
Sarah Routledge
Comments
Newsletter sign up