The days of a credit score only being important when applying for a mortgage or credit card have long passed. Whether you’re looking for a payday loan, new mobile phone contract, insurance or even switching energy suppliers, your credit report will be checked.
Your credit score doesn’t just dictate if your application will be successful or not. But also what interest rate or tariff they may offer you.
It is now possible to see the same as companies by accessing you credit report online through services like Experian, Equifax and Call Credit. Even for those who have seen their report they are still left with many questions. Such as what a credit score is or how it is calculated?
This week we answer these questions as well as debunking some common held myths.
What is a Credit Score?
When you apply for credit any company acting responsibly will check your application, credit report and any passed history you may have with them. This is to create an individual credit score for you.
Quite simply the higher your credit score the more likely you are to be accepted when applying for finance. In turn the higher your score the more likely you are to receive the best deals and interest rates. Why is this? Risk!!
If you have missed payments before you are seen as a higher risk and less likely to get finance. If you are offered credit this is often at a much higher interest rate than the one advertised.
Credit Scoring is about predicting your future financial behaviour based on your past actions. Therefore if you do not have any credit history you may also find yourself in the same situation. As without a past it is difficult to predict your future actions.
How is it Calculated?
Every company will generate a different credit score for you based on their individual requirements. It is for this reason you may be declined for a credit card but accepted for a payday loan.
Although this may seem confusing, every company will assess the same 3 things:
-Your Previous History with the Company
-Your Credit Report
Firstly it is important to fill in your application correctly and honestly. For example stating that your monthly salary is £150 instead of the actual £1500 will likely mean a very different result.
In turn if you have missed repayments with a company, they are much less likely to issue you with finance in the future compared to an individual who has repaid on time.
Lastly your credit report shows the following information:
-Electoral Roll Date: This contains information on where you live and have lived.
-Court Records: Such as; CCJ’s, Bankruptcy, IVA’s and any other court order that may indicate a debt problem.
-Search Address and Linked Data: This includes all the companies that have viewed your report as well as any other addresses or persons you are financially associated with.
-Account Data: Banks, building societies as well as other financial institutions, utility suppliers and mobile phone companies share data about you covering the last 6 years. This includes any defaults you may have or have had.
Credit Score Myths
Now we know what makes up a credit score and a credit report. Now is the time to debunk some common myths:
-According to Which Magazine 75% of people believe that having a bad credit history means you are put on a credit blacklist. This is simply not true, no such list exists.
-Previous occupants of your address and other family members affect your credit report. This will not happen unless you have a financial connection with them like a joint bank account or mortgage.
-Items stay on your credit report forever. As mentioned before, most information is only held for 6 years.
-Repaying a credit card in full lowers your credit score. You are actually likely to get a better score.
-According to Experian 78% of people believe if they are rejected for finance this will appear on their credit report. Actually all that is shown is that they have looked at your report.
-Registering on the Electoral Roll is not important. On the contrary this confirms your identity at your address and allows you to build a credit history. If you are not registered your credit report cannot be viewed and a lender will be very reluctant to lend to you.
-You can view your credit report too much. On the contrary it is important to check this regularly to ensure there are no mistakes. Also lenders cannot see if you have accessed your report.
Today we have explained the difference between your credit report, available to view online by both your and any company you wish to gain finance from online. And your credit score, which is calculated differently company to company. As it is based on your application form, history with them and credit report.
Whether your credit score is good or bad right now this will change over time in relation to your circumstances. For example, paying off a loan could result in a higher credit score, while missing several repayments could reduce it.
There are now a number of websites such as Experian, Equifax and Call Credit where you can check your credit report online. Now that you know what is on your credit report and how to understand it. Don’t bury your head in the sand, go check yours today!!
In two weeks we will provide you with tips on how to improve your credit report and credit score.