Understanding your credit score
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What is a Credit Score?
A credit score is a number attributed to an individual by a lender based on the analysis of your credit report from credit reference agencies. There is no universal credit rating system in the UK, there are three main credit reference agencies – Experian, Equifax and Callcredit.
Lenders, such as Banks, subscribe to one or more of these organisations and use the credit score given to ascertain how likely it is that they will be repaid on time if they give that person a loan. The credit score determines how much you will be eligible to borrow and at what interest rate.
If you are a sole trader or partnership looking for finance, then it is very likely that your and your partners' personal credit history will be checked. A poor credit history may present an obstacle, especially to Banks who have tightened their policy on lending since the financial crisis and with all of the new FCA regulations which are highly publicised in the media.
What factors affect my credit score?
Credit scoring is complex and the structure differs from one lender to another. However, certain elements from your credit report will shape your credit score, such as:
- The amount of debt you currently have
- Number of late payments (if any)
- Age of accounts
- Types of accounts
What does my score mean?
Your Experian Credit Score can be broken down into five categories; very poor (0 - 560), poor (561 - 720), fair (721 - 880), good (881 - 960) and excellent (961 - 999).
Equifax scores out of 900 with 400-474 regarded as 'good', whilst anything between 475-900 is 'excellent'. The Equifax Credit Score™ score is accompanied by Risk Signals and analysis that help to explain your score. These factors are more useful than the score itself in helping you understand what the score means about you.
Scores are out of 1,000 and are accompanied by your credit rating, which displays your overall credit worthiness as a number between 1 and 5.
What is the minimum score that I need to get credit?
Lenders need not reveal their credit score head, nor need they reveal the minimum credit score required for the applicant to be accepted. Owing only to this lack of information to the consumer, it is impossible for you to know in advance if you will pass a lender's credit scoring requirements.
How do I improve my credit score?
In the UK, there's no such thing as 'black list' or a 'universal' credit rating. Your number is not set in stone and different lenders assess your credit differently because they use their own formulae comprising other background information. Also, it is possible to improve your credit score – here are some tips below:
- Your most recent borrowing history has more weighting on your score, but missed or late payments stay on your credit report for up to two years, so try not to miss a payment!
- Make sure that you are registered on the electoral role.
- Manage your credit cards responsibly - set up direct debits so payments are never late or missed, even if you are away on holiday.
- Stay away from 'credit repair' agencies that offer to remove late payments
Should I shop around for the best rates?
Making a lot of credit applications with different lenders leaves a 'footprint', and they may think that you are in financial difficulties.
Here at Snowbird Finance we work very closely with a number of the UK's leading lenders and we carry out a 'soft search' on your credit file, which isn't visible but will allow us to gain a decision in principal before submitting for approval to the most relevant finance company to suit your requirements.
How is credit scoring regulated?
In the UK, credit scoring is closely regulated by the Financial Conduct Authority, with the industry regulator being the Information Commissioner's Office (ICO).
What if I am turned down for credit and wish to complain?
If the applicant is declined credit, the lender is not obliged to reveal the reason why. However, some industry associations (including the Finance and Leasing Association) require their members to provide a satisfactory reason. Credit referencing data sharing agreements also require that an applicant declined based on credit-referencing data is told that this is the reason and the address of the credit bureau must be provided.
Consumers can send complaints to the Financial Ombudsman Service if they experience problems with any Credit Reference Agency.