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Back in 2008, the financial crash led to the loss of thousands of jobs, and the government having to step in and secure the future of banks such as the Royal Bank of Scotland. When the causes of the crash were fully investigated, it was found that one of the main causes was what was termed subprime lending. In basic terms, this meant that the banks were offering credit to people or companies who were a precarious financial situation, and when energy prices started to rise in 2007, these bad risks started defaulting on their loan or mortgage payments.

One of the main consequences of the 2008 credit crunch was that the banks totally changed the way in which they approach lending decisions. It’s now all about affordability for the customer, not just at the time when the credit is taken out, but also in the future. Responsible lending is the term most often used by the financial services industry, but what does this mean from the point of view of someone thinking of applying for a new mortgage or credit card?

Importance of Soft Searches

The first thing to think about is that different lenders prefer to deal with different types of customers. Some banks, building societies or credit card companies for example target very high net worth individuals who earn £100k a year or more, so even if your credit score is as good as it could be, you are wasting your time applying for a credit card with them if you are in a minimum wage job. Similarly, one company may be willing to take a risk on someone with one or two late payments on their credit report, whereas another may not risk lending to anyone in that situation. One good way of working out whether you are likely to be accepted for a loan or other agreement is to carry out a soft search, on a site branded as an eligibility calculator or checker. These sites can’t ever give a cast iron guarantee that you will or will not be accepted but can give a general probability. Most sites will rank all lenders in order of probability, allowing you to quickly select the lenders which you stand the highest chance of success with. This is known as a “soft search” and won’t show on your credit record like a firm application for credit.

Factors Considered by Lenders

Apart from companies which target borrowers in a specific salary bracket, or who live in a certain location, there are some other more general factors which lenders will look when evaluating how risky you are as a potential customer.
The most important of these is your credit score. Your credit score and related credit history will tell a lender whether you are currently managing your money, and whether you have missed payments of been taken to court over not paying back loans in the past. You can check your own credit score by requesting your credit file from Experian, Equifax, or TransUnion, or by downloading one of their smartphone apps.

Many credit agreements, especially for larger amounts, will have an affordability checker questionnaire. Applicants will be asked about their income and outgoings, so that the lender can work out whether they are on a tight budget or have plenty of extra cash coming into the household. If the bank decides that your finances might be too stretched to meet payments if your situation changes, they might either decline the application altogether, offer a smaller amount, or increase the interest rate to cover the additional risk that you won’t pay back.

Banks and other financial institutions have never lent money no questions asked. Since the concept of credit began, they have always asked some sort of questions to make sure that the person who is being lent the money can afford to pay it back, and more importantly, will pay it back. We are all used to the credit checks which are run when we apply for a new loan, and many will have seen the adverts on television or online showing how easy it is to check your credit score using an app. What is less understood is the parallel process of fraud checking, which aims to help banks identify fraudulent applications.

CIFAS

The Credit Industry Fraud Avoidance System, or CIFAS, was established in the 1980s and helps financial services organisations share information about people who have tried to make fraudulent applications for credit, or who have been caught involved in something like insurance fraud. They also hold information about people working in financial services businesses who have been found guilty of fraud in the past.

Identity Fraud

One of the main roles of CIFAS is to protect the banks and building societies against identity fraud. If a criminal can get enough details about you, including your name, date of birth, address and other key details, that might be enough for them to take out a mobile phone contract, loan or order goods on credit. The fraudster then disappears, leaving you with the debt for an agreement you never signed up to.

Identity fraud can have a serious effect on your credit score, especially if you are not in the habit of checking it regularly. Every time you – or someone pretending to be you – makes an application for credit, then this is recorded on your file. Lots of applications in a short period will negatively affect your credit score. If the fraudster is successful in taking out credit under your name and then fails to pay, then this will damage your credit score even further.

CIFAS and Fraudulent Applications

CIFAS is an industry body and aims to protect the banks and building societies rather than the individual. They look for patterns in applications to try to spot potential fraud, which is then flagged up for further checks. They are understandably cagey about how they go about this, in order not to give clues to the fraudsters about how to evade the system. CIFAS also hold information about convictions, bankruptcies and people who have had insurance policies cancelled which lenders can access.

Protecting Yourself Against Identity Fraud

Apart from being aware of not sharing personal details such as your date of birth online, one of the best things you can do to protect yourself against identity fraud is to keep an eye on your credit score. The main credit reference agencies – Experian, Equifax and TransUnion – all have websites and apps to help you do this. You don’t need to be checking your credit score obsessively every hour; once a week or so is probably enough. If you spot any unusual activity on your credit record then take action right away.

First, tell your bank or other lenders about transactions or accounts which you don’t recognise. If you do see on your credit record that someone has been making applications for accounts in your name, report it to the police and get a crime number. Then contact CIFAS and ask for protective registration. This will put a big red flag against your name in the database, forcing banks and other lenders to go through an extra layer of checking to make sure it’s really you who is applying for a new credit card, not the fraudsters.

Apps such as ClearScore have made it easier than ever to check your credit rating instantly. Credit scoring is based on a huge range of factors, and your credit score can change over time depending on your circumstances. Credit scores are a measure of how risky the banks or other financial institutions think you are – will you pay back any money they let you have? In general terms, the higher the number, the better the credit score and the more likely you are to be successful when applying for a car loan or mortgage.

If on the other hand your credit score is on the low side, you might struggle to get a credit agreement at all. The good news is that there is lots you can do to affect your own credit score and get the numbers climbing upwards. Often, low credit scores aren’t necessarily because you’ve done anything wrong in the past; people who have never before taken out loans or credit cards will find their scores are lower just because they have no track record to be judged against.

Good Money Management

Perhaps the most important thing that lenders are looking for when deciding who to lend money to is someone who is responsible in managing their finances. They want to see someone who never struggles to make payments on a loan, who doesn’t make late payments and who doesn’t skip payments altogether. Being organised with your finances isn’t easy though and if you’re juggling work, kids, and lots of other responsibilities, it’s easy to take your eye off the ball.

We’d always advise setting up direct debits from your main current account to pay off a loan or credit card automatically. Once set up, the direct debit agreement will make sure that your monthly phone contract or loan repayment leaves your account on the same day every month. If you run into financial difficulties, then contact the lender straight away rather than allow a payment to be missed.

Borrow Responsibly

Overstretching yourself is going to increase the chances of you getting into difficulties. Lenders do look at affordability when assessing whether you should have another loan or credit card, but there is no compulsion to use all the credit you have been offered. Owing less than you have been allowed to borrow goes in your favour. Credit scoring firms can look at how much credit you have available across all loans or agreements, not just from one particular provider.

Don’t Chop and Change

Sticking with a few loans or accounts over a longer period is seen more positively than chopping and changing your credit card provider regularly. If you have had the same credit card or mobile phone providers for years and have never missed a payment, then this is going to give you more “points” than someone who has only had a credit card for six months and has a shorter record with the company. Checking your credit report online should also flag up any unusual activity on your record which could indicate identity fraud, enabling you to take instant action before a fraudster does lasting damage to your score.

Register to Vote

This is perhaps the most important thing you can do to boost a credit score. All lenders will make sure that you live where you say you do by checking against the list of registered voters. If they can’t find you, then you are likely to be declined straight away. Getting onto the electoral register is free and can be done at any time, just Google “register to vote” to be taken to the official government site.

Those adverts on television about “knowing your numbers” in terms of credit scoring prompted thousands of us to download apps onto our phones to track our credit score. Typically, the app will show some sort of traffic lights system. If you’re in the green, your credit score is healthy, amber means that perhaps there is some work to be done to improve matters, and red means that you might struggle to access credit. It all makes it very simple and straightforward, but putting a definite number on a good credit score isn’t nearly as easy as you’d think.

Credit scores are important if you are thinking about taking out a new mortgage or loan, or even applying for 0% finance for a new kitchen or furniture. If you have a good credit score, then you have more choice over which financial products to go for and will probably be able to secure better interest rates than someone who has missed payments in the past.

Credit Reference Agencies

Although your bank and other lenders do hold information about you, credit scoring is done by one of the three main agencies in the UK – Equifax, Experian, and TransUnion. Each of these organisations does things different and will have differing information about you. Each will evaluate risk in a different way, which goes some way to explaining why you might get a different credit score number when you check on each of the three sites. Lenders usually deal with one of the credit referencing agencies, and each lender has its own policy for checking credit scores at one, two or all three of the referencing agencies. If you think that your score at one of the three agencies is much lower than it should be, then this could be because there are errors on your account. Ask the agency for your full credit file and check it for any errors. Mistakes can be corrected but it takes time, and you will be asked to provide evidence to support your claim; they’re not just going to make changes on your say so.

A ”Good” Credit Score

A credit score is only a general indication of your financial health, and each lender will make its own decisions about who to lend to, taking into account a wide range of factors. Having said that, it’s definitely true that people who have a good credit score are more likely to be accepted for credit than someone whose credit score is rated as fair or poor.

Each of the three main agencies has their own scale for rating credit scores. With Experian, for example, the maximum score possible is 999, whereas the Equifax scale only goes up to 700. This can lead to confusion. For example, a score of 600 would be poor on Experian’s scale, excellent on Equifax, and fair on TransUnion. Someone who scores upwards of 800 on Experian though, would similarly find themselves graded as good or excellent on the other two sites also. Your credit score number won’t be the same across all three sites, and it’s therefore more important to look at the band you fall into.

Improving a Bad Credit Score

If your credit is rated as poor, bad or even fair, you might struggle to access the best deals on the market and be forced to take higher interest loans pitched at “risky” customers. Try to improve your credit score by paying off old debts, getting onto the electoral roll, and creating some sort of reminder system to make sure you never miss a payment on any account or loan.

We all know that whether or not we are successful in applying for a loan, credit card or similar depends on our credit score. Many people though think a credit score is one of those things over which we have very little control, but this just isn’t true. There are lots of positive steps which you can take to improve an average or poor credit score, but on the flip side, there are also actions which will damage your credit score too.

Frequent Changes

If you keep an eye on your credit score, you will probably have noticed that your score dips a little when you open a new bank account or take out a new credit card. As you start to build up history with your new account by making regular payments or not going into an unauthorised overdraft, your score will recover. But if you decide to change provider quickly, opening a new account every few months, then your score might never get the chance to recover fully.

Appearing “Desperate”

Whether it’s the case or not, lenders are going to perceive someone who has maxed out their available credit as desperate or in serious financial difficulties. This could apply to you if you are carrying a big balance on a credit card and only making the minimum payments each month rather than trying to pay it off.

Similarly, applying for new credit agreements too often can damage your credit score too, even if you are accepted. Every time you apply for new credit, this is registered on your credit file and known as a hard search. A better way of working out your likelihood to be accepted for a new credit agreement is to carry out a soft search first, which will give an indication whether you are likely to be accepted or not.

Missed Payments and Financial Difficulties

If you miss payments, make late payments or have defaults recorded on your credit record, then this can seriously lower your credit score for as long as six years. Although it may still damage your credit score, it’s always best to talk to lenders and explain the situation with a view to renegotiating terms rather than just ignoring the issue.

Overstretching yourself and owing more than you can afford to pay back might mean you have to consider more drastic action, such as going bankrupt or getting an IVA (Individual Voluntary Arrangement). Lenders might also go to court and have a county court judgement (CCJ) issued against you to try to force you to pay a debt back. Any of these issues can reduce your credit score to the minimum and make it difficult to open even a basic bank account. When taking out any credit, it’s important to think about not only affordability now, but how you would manage to keep making payments if your circumstances changed.

Lack of Credit History

If you’ve never had a credit card, a loan, or mortgage, then the banks simply have no information to base their assessment on, resulting in a low credit score. People in this situation can establish a credit track record in a range of ways, such as taking a mobile phone contract on a pay-monthly basis rather than pay as you go or applying for a basic credit card with a low limit, which they then pay off in full each month. Doing this every month should see your credit score start to climb, but it could take six months to a year of making regular payments before you see results.

If you’re in the habit of keeping track of your credit score, and it’s the same month after month, then it can come as a shock to see that suddenly your score has dipped. This never happens for no reason though. Although everyone’s situation is different, there are eight main reasons why your credit score has declined.

New Credit Application

Every application for a new loan, credit card or similar will leave a trace on your file. If you are just trying to shop around and look for the best deal for a new loan, head to a site branded as an eligibility checker or comparison site which will give an indication of what loans you may be offered without making an impact on your credit score. Your credit score will dip after you take out any new product, so give it a chance to recover before applying for another.

Credit Searches

This is a similar point to the one above. If you run multiple hard searches over a short period for a new financial product it can give the impression that you’re in a poor financial state and searching desperately. Only ever start searching for credit or applying for credit when you need to and can afford to.

“Red Flags” on Your Account

The most obvious reason for a dip on your score is a negative marker on your account. A new lender wants to deal with people who have a good track record of paying their credit back without having to be chased up. Making payments late, or missing payments altogether, can dramatically lower your credit score and lead lenders to decide that you’re too risky to deal with at all. If you’ve been a victim of identity theft, this can also damage your credit rating while you go through the steps to have the fraudulent applications taken off your account.

You’re “Maxed Out”

Lenders will look at a “credit utilisation ratio” which is just a fancy way of describing what percentage of your available credit you are using. If you are up to your limit on your credit card and living permanently in your overdraft, lenders are going to be unwilling to lend you more money and potentially make your already poor situation even worse.

Decreasing Credit Limits

If you’ve called a provider and asked that they lower your credit limit, you might think this would increase your credit score. In fact, it can have the opposite effect as it affects the ration discussed in the point above – you now owe a greater percentage of your total available credit. It’s usually better to keep the credit limits as they are, but just to keep your spending low.

Closing a Credit Account

As explained in the point above, this can affect your ratio. It’s usually best to keep old, and infrequently used credit accounts as a long history with one provider is going to go in your favour as you are showing your reliability.

Mistakes on File

Inaccurate information is going to damage your credit score. The good news is that if you spot a mistake on your file, the referencing agencies will correct errors if you can prove they’ve got it wrong.

Joint Accounts

If you share a bank account or loan with someone who has a poor credit record, then this could affect your credit score too. Simply living at the same address as someone with debt or being married to them shouldn’t affect your own score; it’s just joint loans or other credit agreements which could cause a problem.

Smartphone apps which allow you to check your credit score are now commonplace and free to use, and many of us use them regularly. But the apps and the credit score only gives a very broad indication on your credit file. The numbers on their own will give you an idea about which band you fall into, and tracked over time, can tell you if your credit situation is getting better or worse. But if you do suddenly see your credit score starting to dip, you then need to ask for access to your full credit file to understand what is going on. When you request your full file, you will be able to see the same information as the banks are seeing when they decide whether to lend to you or not.

Where is My Credit File?

Although any company which you have a financial relationship with will have information about you, this isn’t the same thing as your credit file. In the UK, there are three main agencies which work with the banks and other institutions to give them information about us and our credit history. These are:

• Experian
• Equifax
• TransUnion

Each credit referencing agency does things differently, and as such, the information which each one holds can be different. This also explains why you might see differences between your credit score if you check on two or more apps or websites.

Accessing Your Credit Report

Requests for your credit report has to be done through the Credit Referencing Agencies (CRAs) and you should be able to find a link on their websites to do it online. You may choose to access your report at just one of the agencies or all three; it’s up to you. Usually, they will ask you to create an account with their website to order a full credit report. There might be a charge for this, although many will offer a month’s free trial first. You will have to give the CRA enough information about you to allow them to identify you from anyone else with a similar name or date of birth. The CRA will also ask about any other names you have used in the past (such as a maiden surname) and any addresses where you have lived over the past six years. Once the CRA has accessed the information they have about you, it will be sent out by post, or email.

Does Checking My Report Affect My Score?

Asking one of the CRAs for access to your own credit report won’t affect your credit score. It is only when lenders search your file that your credit score may be affected. Applying for credit will show on your credit report and score, and making frequent applications over a short period of time may lower your score. There is another sort of check known as a soft search, generally carried out through an eligibility checker, or comparison site which instead of being a hard application, just gives you a general idea about what sort of products you might be eligible for, and what interest rates you might be able to access.

Inaccuracies on Your Credit Report

Once your credit report arrives, the next step is to go through it carefully. If there is information on there which is wrong, then you have the right to ask the CRA to have it corrected. This is called “raising a dispute”. If you find a mistake on one credit file, then request reports from the other two agencies too as errors may be duplicated. You will be asked to provide some sort of evidence to back your claim that the CRA has made a mistake.

The credit industry in the UK is massive with almost 500,000 store and credit cards and approximately 100,000 mortgages issued a month. Lenders must make a multitude of decisions of whom to lend or not daily. For all of this, they need credit data for all the applicants that are available in the form of credit history and scores.

Here is some of the important stuff you need to know about a credit score:

Understanding a credit score

It is a three-digit score allocated to individuals 18 and above in the UK and shows how creditworthy they are. All the credit-related information is gathered by three credit reference agencies in the UK viz. TransUnion, Equifax and Experian. Every lender has their method of credit score calculation with the data they get from the CRAs.

For an individual to know what their credit score is they can subscribe to any online service for a fee and get their latest credit score. Some services also offer this facility free of cost.

Calculation of a credit score

There is no definite format as to how the score is calculated. Neither the CRAs nor lenders share any information as to how they go about calculating the score. However, there are certain common factors they refer to in the credit score calculation process like:

• If the applicant has a permanent address at this they have lived for some time.
• Repayments and credit card payments on the due dates.
• The name is on the electoral roll.
• The kinds of loans the applicant has taken.
• If the individual applies for credit frequently?
• The length of the credit history of the applicant.
• If the applicant uses the loan facility or credit cards to its upper limits.

Good credit score

The credit scoring pattern differs between CRAs. The one common factor is having a good score is considered acceptable. Any individual whose credit score lies between 60 – 66% of the maximum will have a good score that is acceptable. E.g., Equifax calculates from 1000 with any score between 550 and 700 considered acceptable with a score above that range would be good and anything above 800 very good.

When does one qualify for a credit score?

Once an individual is 18 years they qualify for a credit card, mortgage, loan and any kind of credit agreement. Anyone younger will not be eligible for credit as legally they cannot be liable for payments thus making them ineligible for applying for any type of credit. Upon reaching 18 years of age and opening a credit line of any kind, CRAs and lenders begin calculating the score based on the credit history and activity of an individual.

Importance of a good credit score

Having a good credit score carries several advantages to it. An applicant with a good credit score will find it easier to get a mobile contract and a credit card or a mortgage with attractive interest rates and other perks. The best deals are available to only those with good credit scores.

Having a good credit history is vital to building a great credit score. For those individuals that do not have a credit history building it from scratch can prove a challenge. However, with time and patience it is possible to build a decent score in the following ways:

Get a bank account: For those that do not have one getting a stable bank account is the first step in building your credit history. Having a bank account helps in building a credit score by:

• Having a bank account for a long time shows financial stability to lenders.
• It helps in saving money and making payments via the bank that influences your credit score.
• It helps to serve as address proof verification.

Get on the electoral roll: Being registered on the local electoral register is beneficial in the following ways:

• It serves as identity proof and makes an applicant less risky to lend credit to.
• It shows that the applicant has a permanent address that indicates stability and increases the likelihood of having debts repaid.

Building credit history

While one cannot get credit without a good credit history one cannot have the latter if they have no credit-related transactions. It is a Catch-22 situation of sorts.

Some of the ways to resolve the issue include:

Explore getting an overdraft from your bank

Having an overdraft facility allows an account holder to borrow money from a bank. As it is credit, it reflects on the credit report. Certain current accounts have this facility by default, so check with your bank. If not, speak to the bank and ask them if they could offer this facility to you. Preferably avoid using an overdraft because of the high-interest rates. It is just to add build up the credit history.

Get your name on all your utility bills

Most utility bills payments made are reported to the three credit reference agencies (CRAs) operating in the UK i.e., Equifax, Experian, and TransUnion. These include broadband service providers, among other utility companies. For someone that is just starting to build their credit history having their names on these utility bills is a convenient way to build up their credit history. Ensure that the spellings of names and addresses are accurate on all of the bills as even a minor mistake could lead to mistakes featuring in the credit report.

Use the direct debit facility for payments

If there are recurring bills every month issues in your name they should be paid by the due date and in full. The easiest way to avoid losing track of monthly payments is to set up an auto-debit facility every month. The money will automatically get deducted on the due date and this will show up like regular and timely payments in the credit history that will help to boost your credit score. The only thing to ensure is there is ample money for the payments in the account every month.

Try to get a credit builder product

Certain products help build up credit history without the need for a credit check. They do charge a monthly fee but if you can afford it, they will help to build your creditworthiness over time.

Without realising many individuals unwittingly hurt their credit scores through incorrect financial decisions.

While these may seem trivial and are soon forgotten these sometimes later pop up as part of the credit history and hurt the score.

Just a few of the ways that people can end up adversely affecting their credit score are:

Loan payments made after the due date

While only some avoid repaying unsecured debts, many defer payments until later, thus skipping the due date. It may seem okay at that time but missing the payment on the due date has serious consequences as they reflect in an applicant’s credit history that might become a cause for the lender refusing to give credit.

Defaulting on mobile repayments

Getting the latest mobile phone is something most people get excited about. The one thing that most buyers do not realise is that the mobile contract signed is a credit agreement. The handset is included in the contract that is paid for as per the terms and is part of the Consumer Credit Act. Missing or defaulting on a mobile phone contract will directly impact the credit score negatively.

Skipping credit card payments

With almost 70 million credit cards circulating in the UK, these are a very popular way of making purchases. However, missing out on any of the minimum repayments can have a severe impact on the credit score. A lender will assume that an applicant skipping minimum repayments is a high-risk individual and not safe to lend any credit to.

Payday loans

Millions of people across the UK opt for Payday loans that are short-term but carry high-interest rates. This does a lot of damage to their credit profiles in the long run even if they make repayments on time. Any lender that finds Payday loans taken frequently by an applicant will baulk at lending as they would consider the applicant to be unable to manage their finances. As far as possible it is best to avoid taking these kinds of loans unless necessary and unavoidable.

Multiple loans or credit cards

Some people like to own multiple credit cards or take out multiple loans and also do make their repayments on time. However, the disadvantage of these is that prospective lenders will assume that the applicant’s financial status is shaky and this may prevent them from giving credit.

Not registered

One of the most important things that lenders look at closely is the identity of the individual and the address they live at. They get this information from the applicant’s details on the electoral roll of his borough. If you are not on the voting list of your area it is unlikely, they will consider issuing any credit.

Not having an adequate credit history

While the general belief is not taking credit is a good thing it can backfire when you do apply for credit. Lack of adequate credit history with the credit reference agencies can also impact your credit score.