Credit Reports Information
Keeping a good credit rating – subject to status and conditions
The term 'credit rating' is often applied to an individual's credit history and spending habits, and it often seen as an overriding factor which will determine whether or not a person is eligible for certain types of loan, credit cards, mortgages, insurance…
In fact, there are many different credit rating or 'scoring' systems employed by banks and credit card companies. Similarly there are a number of factors which can influence a lender's decision on how much credit they will provide you with. As such, there is no such thing as a universal credit rating; just because you are refused credit from one bank, this does not mean that another lender will refuse you.
Scoring systems are used to predict your spending habits. They are collections of data that a lender will use as a rough guide to ascertain how much money they think they can get out of you. The amount of credit you will be furnished with from a typical lender is largely dependent upon three things; your income, your borrowing past, and your credit report.
This is a rough guide to help you understand the reasons why a lender may refuse you credit and what you can do to improve your chances of getting an keeping a good credit rating.
Earnings and Holdings
When you apply for a loan, whether its over the phone, face-to-face with a member of staff, online or on a paper form, you will be typically be asked questions about your financial status, chiefly how much you earn per month, where you are living (if you are a home owner, tenant, living with family), if you have any dependents, and what your basic monthly living costs (food, utilities, transport, etc) are.
Companies will use this information to assess how much you can repay per month, and will affect the amount you will be eligible to borrow. Your monthly pay packet and how you divide it up usually has the greatest influence on lenders' decisions, as not all clients are home owners.
However, the value of your property, if you have any, can also be a
deciding factor, as banks will see it as collateral they can claim if
you are unable to keep up with repayments, or may well attempt to sell
you a mortgage as well as a loan.
For this reason, clients who are home owners stand a chance of getting
a better credit rating than those who rent accommodation – home
owning-clients are seen as being 'secure' or 'stable' in that they are
easy to contact, and usually tied to one address.
As many credit agencies include addresses in their reports they make on all consumers, providing an address you don't plan on living at for longer than six months may be a bad idea, as the next person who moves in may have a history of debt problems, which could see your name associated with this so-called 'black data'.
There are also certain loans that are also available exclusively to home owners offering lower repayment rates than typical loans available for anyone regardless of where they live.
Your marital status, particularly if you have a joint-account with a significant other may have an affect on your credit rating, particularly if your partner has a bad credit history. Setting up a joint account to pay for utility bills for example, could see your details listed next to someone with a poor history, which could potentially mean refusal of credit in the future.
Borrowing past
Keep in mind that banks and credit card companies are primarily interested in seeing a profitable return on their investments, and so if you say that you can repay your loan straight away, they are probably going to be less likely to cough up the dough.
So called 'good risk' investments, i.e. a loan that can easily be paid off, are often rejected by banks, simply because the amount of profit they would make from the loan doesn't justify the time and paperwork they would have to devote to it.
A lenders' ideal client is one that is continually in debt, always making minimum monthly amount so that they have a regular stream of income with which they can use to cross-fund other company investments, usually lending the money out to other clients, who will in turn, have to pay it back with interest, which can then be lent out to others, and so on.
So, if after having taken out a loan, and you pay significantly more than the minimum repayments every month, or pay off everything in full, say after three months, this could seriously affect your ability to borrow money in the future.
One habit that lenders tend to universally hate is customers who continually move their debt across into accounts that have 0% interest on balance transfers for a set period of time, and then moving the debt to a similar account before that time has elapsed.
Of course, making the basic minimum repayments will see you paying back considerably more money than you borrowed in the first place – this will certainly keep credit card companies happy, but it also means that you lose a lot more than you could save.
The trick is striking a balance between what they want and what you want – paying back a fixed rate based on much as you can afford per month, every month is an effective way of ensuring that you don't pay back an amount well in excess of what you initially borrowed, and also won't check any future borrowing plans you may have. For more information, see our help with debt problems page.
Outstanding Debt and Multiple Credit Cards
Regarding future borrowing plans, any outstanding debt you have accrued is also a factor in applying for credit, unless of course, you are applying for a loan to specifically cover this debt. If you already have access to an amount of credit, this can potentially lower the amount of credit you will be able to borrow from other lenders, and can even prevent you from borrowing anymore.
If you find that because of outstanding debt your borrowing limit is curtailed, then you can attempt to improve your rating by shoring up all your debts into one consolidation loan as an 'act of goodwill', so that your rating improves for the future.
Generally speaking, it is not a good idea to have more than six cards registered in your name, even if you have ones that you only use infrequently and pay off more or less straightaway. If you have a few cards that you do not actively use, it is a good idea to cancel them, as not only will having multiple cards affect your rating, but if you choose to cancel an account with a bank, it may galvanise them into offering you a deal in order to keep you as a customer.
Conversely, having one or two extra cards besides one that you use frequently may work in your favour. Not only having an extra account from which to borrow small amounts of emergency cash gives you the flexibility you might need (which would conceivably stop you from going into the red in a single account – something which lenders do not generally like), but some lenders like it if you have more than one card, as it suggests that you are able to juggle your finances.
What is a Credit Report?
Credit Reports are compiled by credit reference agencies, and are used by lenders to build up a credit history of prospective clients. The information that makes up individual credit reports is drawn both from public records and personal financial details.
Information drawn from public records includes publicly available information such as electoral roll information (any names and addresses, who lives at which address and with whom, etc), and court records, which will contain information on any legal proceedings, specifically any concerning the settlement of outstanding debt, County Court Claims and Judgments (CCJs), and any individual voluntary arrangements and/or bankruptcies.
Financial details are collected by lenders – banks, building societies, credit card companies – and are based on your spending habits; records of all payments, outgoings, direct debits, any past rejections for credit, any existing credit card accounts etc, are kept so that an accurate picture of your monthly incomings and outgoings can be viewed by lenders so your credit situation can be easily assessed.
Where and how can I get a Credit Report?
Most lenders share some, if not all of their customer's data with credit reference agencies. Any present credit cards, outstanding loans, records of missed or late payments, or any problems may also be included in credit reports.
The main credit reference agencies who operate in the UK are Callcredit, Equifax, Experian and TransUnion. All of these groups routinely check and update their databases with personal credit information on UK citizens. It is a statutory right for everyone to be able to see their respective credit reports - each credit report is available from each of the agencies either by post or online for a fixed fee.
Lenders typically will draw information from more than one source, so that they can cross-reference data and query any anomalies. The two credit agencies from which Capital One obtain customer information are Equifax and Experian, so be sure to get in contact with both of these if you're thinking about applying for any of their services.
It currently costs around £2 for a full credit report to be sent to you in the post from one of these agencies. You can also order credit reports online direct from each of the companies' websites. Some groups allow you to sign up for their online report services for a free 30-day trial period – you can be sneaky by signing up, accessing your files and cancelling your account before the 30 days are over, thus getting free access to your credit reports.
Most lenders will say on the FAQs of their sites which of the main credit agencies they take their information from, so do your homework on each lender before applying to them and have the relevant documents to hand when making any calls.
What should I check for on my Report?
It is worth obtaining credit reports from more than one agency, because due to the wealth of the information that all of these groups handle, it is entirely possible that discrepancies could occur; a mis-type could see cards, PIN numbers sent to a previous or incorrect address, if you have been involved in any legal proceedings concerning debt in the past which have been resolved, you need to check to see if credit agencies are aware of this. It is essential to amend any mistakes on address information, which may be a result of you having moved house in the past few years, as this could mean that you will be rated based on someone else's history.
If there is anything on any of your files which need altering, you should write to each agency detailing the error and requesting that it be changed. If it's a simple typing error, such as a capital 'S' being mistaken for a '5', or anything easily provable such as changes to address/contact details , then everything should be cleared up without a fuss and the company will write back to you, informing you that the change(s) have been made. If the issue is slightly more complicated, then you will need to talk to the agency.
What can I do about getting incorrect details changed?
If for whatever reason an agency refuses to change your files, you have the option of adding a 'notice of correction' to your credit file. This is a 200-word statement in which you explain the circumstances surrounding the discrepancy on your credit file – this is worth doing, as it gives you a chance to have your say, and may help you to get a better rating in the future, if a lender reads your comments on the notice and takes them on board.
However, the problem with notices of correction is that some lenders may view a notice of correction as an indicator that the client is likely to be a problem borrower. They are generally cautious of notices because they could contain information which could plausibly be hearsay – if you have proof that can back up your claims, make sure that you include this in the statement.
Attaching a notice of correction will not instantly mean that an application for credit will be declined, it means that it will be delayed until the lender can decide what to make of the information you have provided. Be sure to be clear and to the point when writing any notices of correction, and be sure to include evidence to support your claims – 200 words isn't a lot, so make sure you get it right first time.
Lenders will have a number of reasons for refusing you credit, but under the Data Protection Act, you are entitled to ask for the reasons why, and you can ask for your application to be reviewed – because of this, it is essential that you have as much information available to you as possible. A lender might base their decision on data obtained from just one agency, data which could be incorrect. If you have documents and figures from other agencies to hand, you can easily refute any mistakes, if a refusal of credit is based on wrong information.
Top tips on improving your credit rating
Check your records first
Check your credit records before you make an application. Why? If you apply and get falsely rejected due to a clerical error, the rejection will be noted on any future credit reports, which can be detrimental to any further applications. A quick review of your credit records is well worth your time, as it means you could potentially avoid getting stuck in a vicious circle.
Stay at home
Home owners in full-time employment are good risk clients, and thus tend to score highly. Putting down a landline number as opposed to a mobile phone number on your application form helps too. As moving house means a lot of paperwork for you, it means a lot of paperwork for lenders and credit report groups too. Therefore it is important to make credit applications before you make the big move. Also, as credit reports are based on electoral roll information, make sure you are on it and eligible to vote.
Cancel dormant cards
If you already have access to a number of cards, some lenders may refuse to lend you any more on the grounds that you have 'too much' credit, even if your cards aren't used frequently or at all. If you have a range of unused credit cards, cancel a selection of them to improve your rating.
Time your applications
Applying for credit, loans, insurance in a short space of time can lower your score, as this creates the impression that you are spreading your finances across a large area – lenders don't like this as it is hard for them to predict your moves. Space out separate applications so as not to bring your rating down.
Raise your profile
As most credit scoring systems are based upon looking at your spending habits and predicting trends, the best way to build or improve your credit history is to act predictably. Keeping up with repayments regularly, even if you struggle to make each monthly payment, will go some way in improving your chances of accessing credit later on. One popular rating-boosting tactic involves making small, regular purchases on a credit card which can easily be repaid – doing this over a set period from six months to a year can result in you being offered greater amounts of credit.
Don't be late
Never miss payments, and always try to follow at least the minimum repayment plan for your financial products. Missing payments once or twice will cause big problems that can cost you for years. If you are going to be late with a payment by a few days, it is a good idea to inform your lender, as this can work in your favour. If you can quickly arrange to reschedule a date for a payment which you will be able to make, then this will look better on your credit recorded than a missed payment.