Know Your Score: A Mini Guide
Credit is a type of agreement which lets you receive goods, services or money now and pay for them in the future. The repayments are normally made by monthly instalments and you are charged an interest rate, which is a percentage of what you owe. Most people would see it simply as borrowing money in one form or another.
The most common types of credit are mortgages, loans, overdraft and credit cards.
But there are many other situations where you obtain credit, though you might not realise you’re doing it. For example, mobile phone contracts spread the cost of your phone over the length of the agreement.
Most adults have at least one form of credit or will borrow in the future.
Anyone utilising their credit can be considered to be in debt. Though the word has negative associations, not all forms of debt are necessarily bad – for example, not many people could afford to pay the value of their house up front so most of us decide to spread the cost over the years and take out a mortgage.
What is a Credit Report?
A credit report is a document which contains information on your credit history and financial dealings. It clearly shows how you handled your debt in the past 6 years: how much you borrowed, from whom and if you repaid it on time. This also includes such types of credit as utility and mobile phone bills. These are forms of borrowing because you get services and goods (such as a mobile phone) upfront and then pay for them in monthly instalments.
If accurate, you cannot alter the information on your report, but there is an option to clarify the information that appears on it by adding a notice of correction. For example, if in the past you got into debt because of a redundancy but your circumstances have changed since then you can ask the lender to take this into consideration. If, however, there is a factual mistake on your report, you can dispute the information. If it does turn out to be an error, the credit reference agency has to correct it.
Things that appear on your report:
- Personal information (Name, date of birth), your address, previous addresses for the past 6 years, and any financial associations with another person, e.g. joint mortgage.
- Whether you are on the Electoral Roll, which means that you are registered to vote at your address.
- County Court judgments (CCJs), bankruptcies and Individual Voluntary Arrangements (IVAs).
- Credit account information: how much you owe and whether you have paid on time, the age of the account (including mortgages, credit cards, store cards).
- ‘Credit application’ searches carried out on your account.
- Fraud that has been committed using your name or any fraud that you committed using someone else’s name.
And things that don’t:
- Current or savings account information
- Your salary
- Student loans
- Criminal record
- Medical history
- Parking or driving fines
- Council tax arrears
- Information about gender or ethnicity
A lot of the information in the credit report is confidential and that’s why specially licensed Credit Reference Agencies are in charge of holding it. The three agencies in the UK are Equifax, CallCredit and Experian. ClearScore uses credit reference data from Equifax.
Credit Reference Agencies
These are companies which collect information on the credit rating of individuals. The information comes from lenders, mobile phone companies and utility companies. This information is stored and organised by the agency so that it can be easily used by potential lenders to assess a person’s credit risk.
These agencies are connected with the different banks, lenders and credit card companies which pass on your information and details when you borrow money. As all the information from the different lenders is stored in one place, it is easier for a prospective lender to access it when they want to understand your borrowing habits.
However, companies and individuals cannot simply check your report – it's private. They need permission from you which is normally part of the application process for loans and other forms of credit.
Notice of correction
This is a note of up to 200 words that you can add to your credit report to clarify any late payments
or defaults on a debt, e.g. if they were caused by a redundancy.
Everyone is entitled to a free statutory credit report which the credit agencies are obliged to provide within 7 working days of your application.
The document you’ll receive is a simple print out or online version of your report and will not provide you with any supporting information or your score.
What is a Credit Score?
A credit score is a three-digit number which helps lenders decide whether to give you credit. One way of thinking about it is to see it as a measure of risk to the lender. The higher the score, the better you managed your debt in the past, which makes it more likely that you will be considered low risk and therefore given a form of credit.
ClearScore shows you your Equifax credit score. The score ranges from 0 to 700.
A higher score means that your application is more likely to be accepted. However, it also means that you are likely to be eligible for better interest rates and better deals when borrowing money or taking out a mortgage.
Your different scores
None of us have just one credit score. This is in part because there are three different credit scoring agencies and each one of them might have slightly different information about you. Each lender puts different value to the various aspects of your credit report, which also alters the score.
The score is useful because it gives you an idea of how the lenders view you. Most importantly, it allows you to keep an eye on the changes in your score, which reflect the changes in your report.
For example, missing a payment will lower your score but paying off a loan might affect it positively.
Even though the credit report and score information is so important, your access to it has been limited up until now, and people have had to sign up and pay to see their score and report.
ClearScore has changed that. We give you access to your credit score and report for free, with no time-limited trials or hidden costs.
We’re making it completely free because we don’t think it’s fair that you have to pay to see information that can have such a big impact on your life. Having access to your credit score and report means you can plan better for the future and make informed and responsible decisions about how you manage your debt.
Your score is updated every month, so you can monitor any changes. You can see your report and score as many times as you like by logging into your ClearScore account. However many times you check it, there will be no effect on your score.
Tom has a fulfilling career as a paramedic and he has diligently saved up enough to put down a deposit on a house. However, despite the fact that he has a good income and he has managed his finances well, saving a large proportion of his paycheque, he was rejected for a mortgage.
After he was rejected, Tom decided to check his credit report and score, to find out where he has gone wrong. Though he has never missed any payments, Tom also had very little on his credit report to prove that he can responsibly repay debt. Having a ‘thin file’ means that you don’t have enough past credit accounts to give the lender an idea of your habits when it comes to paying your debts.
If you have never borrowed money from a bank or a lender, your credit score will probably be low. However, there are other ways to build your credit report. Some utility bills and mobile phone contracts will count as forms of credit and therefore factor into your score. Perhaps the simplest way to build credit without taking out an unnecessary loan is to use a credit card. If you move a small amount of your monthly spending from your debit card to a credit card and pay it back in full every month, you will be actively building your credit history.
For Tom, the best solution is to start the process as soon as possible. Though building credit is not instantaneous, it’s the only way to ensure that you are eligible for the best rates and that you can secure that mortgage.
After her recent divorce, Amy decided to take care of her finances. Alongside separating her bank accounts and selling the house that she owned with her husband, she also wanted to protect her credit score. Looking into her credit report showed that she was still linked to her ex-husband, even though the financial connection did not exist anymore.
Outdated financial associations which link your credit score to another person can be harmful to your financial well-being. Their debts could affect how lenders see your application, so it’s important to check that you are not incorrectly linked to someone.
For Amy, the solution is to contact her Credit Reference Agency and notify them that the information is outdated. They might ask for proof to show that the connection has in fact been broken but there should be no issues with a disassociation.