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For many students, going to university for the first time means the start of financial independence. Very few students have the means to fund their studies in cash, and most will rely on student loans, overdrafts, or credit cards. Although this sort of borrowing is often essential and shouldn’t always be taken as negative, it’s important to understand how borrowing as a student can affect your credit score and what steps you can take to secure a healthier financial future post-graduation, when you might be thinking about taking out a loan for a new car, or applying for a job which requires a pre-employment credit check. Here are some key points which every student should know about credit:

Student Loans Do Not Affect Your Credit File

Unlike other debt, student loans, regardless of their amount, will not appear on your credit file. So, when you are applying for a credit card or loan, lenders won’t find out about student loan when determining whether to offer you credit.

Affordability Checks

Affordability checks are usually done when applying for a large amount of credit, such as taking out a mortgage. It’s a way of the bank ensuring that you are not overstretching yourself financially, and taking on more debt than you can comfortably afford. Student loan repayments can influence mortgage affordability checks, as these are classed as a household expense or commitment. Lenders look at your ability to make mortgage repayments given all your other outgoings, considering not only current rates but also potential interest rate increases.

Overdraft Use

Most student current accounts will come with an agreed overdraft facility, and staying within that means you will not be charged any interest. Using an “unarranged overdraft”, or spending beyond your agreed overdraft limits, can negatively impact your credit score. Staying within your arranged overdraft limits is essential. Student unions and your bank can give financial advice and debt counselling to students who are struggling to manage their money.

Improving Your Credit Score as a Student

Students who have just moved out of their parents’ home into university accommodation have no credit history of their own and can find it very difficult to get credit at all – not because they have done anything wrong, but because the lenders have no information about them at all. It can be a good idea to apply for a credit card even if you don’t really need to use it as paying off your balance in full each month shows that you can manage credit responsibly. If you are in a shared house where you and your flatmates are responsible for paying the bills, then getting your name on the gas bill or internet contract will also help build your credit score. Registering to vote – either at your home or term time address – will also instantly improve your credit score. There are lots of apps and websites on the market which will let you sign in and see your credit score and get tips about how to improve it.

One of the most commonly held beliefs about credit scoring is that using a credit card is fine, as long as you pay off the bill in full at the end of each month. Many people don’t pay much attention to their credit score, only thinking about it when they are trying to get a loan for a new car or sign up for a new mobile phone contract. Many employers are starting to check credit reports for new hires as part of their standard pre-employment checking, especially in the financial services sector. If you are thinking about applying for this sort of position or are in the market for a new car loan, then it’s important to understand how your credit card use.

Withdrawing Cash on a Credit Card

Most of us use our credit cards to pay for purchases, whether online or in a shop. The benefit of using a credit card for these purchases is that you don’t pay interest straight away, and if you settle the bill when it arrives each month, it’s a good way of spreading your expenses and building a credit history. Most credit cards also offer the option to use your credit card to withdraw cash from a ATM, and this can negatively impact your credit score.

Cash Advances

A post circulating on Facebook claimed that withdrawing cash affects your credit score which is probably where the confusion starts from. Withdrawing cash using a debit card, where the money comes out of your account straight away is not a problem – the main function of a debit card is often to let you take money out. Cash advances or withdrawals on credit cards can be seen negatively by lenders, as this is a form of credit known as a “cash advance”. Most credit card providers will charge interest on cash advances from the day you take the money out, even if you settle your bill at the end of the month. There is no interest-free period as there is with purchases made on a credit card. Credit scores can be affected by cash advances on credit cards, but not by withdrawals on debit cards. This is because lenders are aware that cash advances result in additional interest charges and feel that people only take money out on a credit card when they have run out of other, cheaper options.

Affordability

The other confusing aspect in all of this is that many lenders look at affordability as well as your credit score. Affordability also looks at your financial position and assesses whether someone can afford to repay credit based on their income and expenditures. Cash withdrawals on a debit card will therefore affect affordability, as it will increase your expenditure, but won’t affect credit score.
Credit and affordability scoring can be complicated, and each lender has their own criteria about who they will lend to. Keep on top of your finances by signing up for one of the many apps and websites on the market which will show your credit score and allow you to track it over time.

If you miss or fail to make agreed-upon payments on some sort of debt, you may receive a default notice or “notice of default.” A default is then recorded in your credit file, which can negatively impact your credit rating. If you are then trying to get another form of credit such as a mortgage or loan, or are applying for a position which includes credit checking as part of the pre-employment verification, these defaults could count against you.

What is a Default Notice?

A default notice is a letter sent by the company you owe money to in order to tell you that you are falling behind on payments, and your account may be at risk of defaulting. Usually, a default notice is sent after six months of missed payments. The creditor will usually give you at least two weeks to catch up on missed payments. If you cannot pay, your account will default.

Default Notice and Your Credit Rating

While a default notice itself does not directly affect your credit file, if you do not pay and your account defaults, this will affect your credit score. Creditors may perceive you as a higher risk, and this makes it more difficult to get new loans, credit cards, mortgages, or even a new mobile phone contract.

When you get a default notice in the post, your creditor may demand that you pay the full amount outstanding on the account. While you can ask them whether you can pay in affordable instalments, your creditor does not have to agree to this.

After Default

If you have been given the chance to pay off the debt and fail to do so, the account will officially be in default. If this happens, the company you owe money to has a few options. They could:

• Transfer the debt to a collection agency.
• Take the matter to court.
• For hire purchase debt, ask the court to repossess the vehicle or other goods.

Defaults and Your Credit File

A default will be recorded on your credit file for six years, even if you settle the debt in full. Any default on your file is going to make it more difficult to get other forms of credit, such as mortgages and mobile phone contracts. After six years, the defaulted debt will be removed from your credit file, even if the full repayment has not been completed. Some jobs in the financial services sector may be affected if your account defaults, particularly if credit checks are done before a job offer is made.

Avoiding Defaults

As defaults can have a significant effect on both your credit report and potentially your employment, the best course of action is to try to avoid getting a default in the first place. Defaults are only given after six months of missed payments, so as soon as you realise you are getting into difficulties, speak to your creditor. Many will agree to a payment freeze or temporary lower payments to avoid the expense to them of pursuing the matter further.

Searching for a new job is one of those tasks which can be exciting, frustrating, and demanding of your time and effort. Once you’ve navigated the application and interview, that’s often not the end of the process. Many employers are now conducting pre-employment checks into academic qualifications, references, or employment history. While your credit history is one of the less common checks in the application process, there are some occupations where employers ask to look at your credit report before making a firm job offer.

Which Employers Do Credit Checks?

Most employers do not require credit checks, and those that do must obtain your consent. Typically, employers only run credit reports for roles that involve significant financial responsibility, including positions in industries such as:

1. Law
2. Finance
3. Senior Management
4. Police and Military

What Information Can Employers Access?

Employers may run background checks like credit and criminal record assessments, for security purposes, and each organisation will make their own decisions about what checks are right for their needs. If they want to take a look at your credit report, they will only have access to publicly available information, such as County Court Judgments (CCJs), insolvency records, and bankruptcy filings. Importantly, they cannot view your credit score. If an employer wants to look at your credit report, then this won’t affect your credit score or your chances of getting products like a mortgage, credit card or loan.

Getting a Job with a Poor Credit Report

Employers will use a credit report as just one factor in deciding whether to make a job offer or not, so if your credit report is less than perfect it still might not damage your chances too much. Employers are generally more concerned with significant red flags, such as bankruptcy, than occasional missed payments on your credit card. Employers may worry that severe financial troubles could impact an employee’s job performance, or in the worst-case scenario, lead a worker to be vulnerable to blackmail or be tempted to steal. The influence of adverse credit markers such as bankruptcy or CCJs tends to decrease over time, particularly if you have managed your finances responsibly since you were in financial difficulties. As time passes, your prospects of getting a job requiring a credit check will improve.

Improving Your Credit History

Your credit history can have broader implications, especially if you are thinking about applying for a mortgage or a loan. Anyone has the right to look at their own credit file, so request a copy of the information the credit referencing agencies have and check it for accuracy. If you find any mistakes or defaults which don’t belong to you, ask the agencies to correct their information. Then you can start to gradually improve your credit picture by acting in a financially responsible manner; paying your bills in full each month, not overstretching yourself, and painting a picture of yourself as someone who is on top of your money, organised and efficient.

If you have been given a CCJ (County Court Judgment), it could seriously affect your finances for as long as it stays on your credit record. It may make it difficult to get credit, and depending on your job, might even lead to trouble with pre-employment credit checking. CCJs are only given out as a last resort, after you’ve ignored previous requests to settle a debt. The easy advice is to avoid getting one in the first place, but if you have got into financial difficulties and have a CCJ on your record, there are three key things you can do to remove the CCJ and start to repair your credit score.

1. Pay Within a Month

Paying the full CCJ amount within one month from the date of the judgment leads to its complete removal from your credit report. It’s as if the CCJ never existed. Often, there is some sort of dispute over whether the CCJ is justified or whether the debt is owed at all, but the legal advice is usually to pay the CCJ to get it off your file and then continue the process of challenging it, especially if you have been given a CCJ over something minor like a parking fine. Once you have settled the CCJ in full, the court will feed that information back to the credit reference agencies, who will remove it from your file. When you pay the CCJ, you will need to show the court a completed Certificate of Satisfaction, and proof that you have paid such as a receipt or bank statement.

2. Wait Six Years

After six years, the CCJ is automatically removed from your credit record, even if you haven’t paid it. This doesn’t mean that you don’t owe the money anymore, and in certain circumstances, the claimant can still enforce the CCJ by sending in bailiffs. If your CCJ is already relatively old, waiting for the six-year period to elapse might be the best option.

3. Apply to Have the CCJ Officially Set Aside

When a company takes you to court over an unpaid debt, you have the right to be in court to defend yourself. If you don’t appear in court or acknowledge the claim, the CCJ is issued automatically and is called a “default judgement”. If your CCJ is a default judgement, then you can apply to have it set aside if the process has not been followed correctly. This could be something like sending correspondence to the wrong address which meant you were unaware of the court case against you. There are court fees involved with asking for a CCJ to be set aside, but if your claim is successful, the court usually orders the other side to pay these back to you.

If you have already settled a CCJ debt, this doesn’t stop you from asking to have it set aside, although it might make things more complicated. It’s always best to take legal advice if you are unsure about the best steps in your situation.

One of the main issues affecting people who have recently moved to the UK is difficulties in getting credit cards, loans or even a mobile phone contract due to their lack of credit history. HSBC has become the first British financial institution to check international credit history when newcomers to the UK are applying for credit cards. This could be of particular benefit in the future to people who are applying for a credit report check as part of standard pre-employment checking.

How It Works

HSBC UK credit card applicants, whether new or existing customers, can now choose whether they want to use their international credit history when applying online. Currently, the HSBC service covers 12 countries, including Australia, Brazil, Canada, Spain, Switzerland, and the United States. HSBC has partnered with an international credit referencing agency and is hoping to extend the service to other countries in the future. Opting in for international checks requires your consent for the sharing of this information. Applicants will still be asked for supporting documents such as identification and income details. More information will be needed from anyone looking to access their international credit record, such as their home country ID number or passport number, overseas addresses, and details of when you moved to the UK.

Impact on Credit Score

The impact on your credit score of allowing a UK bank to access international credit history with HSBC on your credit will vary depending on which country you are dealing with. If you are accessing credit history from Australia, India, Spain, or Switzerland for example, this is classed as a soft search which does not affect your credit score. However, credit history from Nigeria or the United States is recorded as a hard search which could affect your credit score. As this system is still very new, it is likely that the system will be standardised over time as more companies start looking at international records.

Alternatives To International Credit History for UK New Arrivals

If you are new to the UK and need access to credit, another option is to look at credit cards marketed for individuals with bad credit. These cards are designed for people who find it difficult to get loans or other credit because of a poor credit score or lack of credit history. These cards typically offer lower limits, higher interest rates, and fewer benefits, but they can help you build your UK credit rating if used responsibly by ensuring that the bill is paid off in full every month. If you are eligible to vote, then getting onto the electoral roll at your British address can also help improve your credit score, as can being listed on utility bills for gas, electricity, or internet. Building credit does take time, and it can take a year or more for scores to improve. Anyone can sign up for one of the apps to manage credit score to track how things are improving over time.

In the UK there are three major credit reference agencies which manage our credit report and credit score. But what exactly is a credit score? Is it the same as a credit report? What qualifies as a good or bad credit score? How do lenders use credit scores when making decisions? And what role does a credit score or credit report have in the pre-employment identity verification checks which some employers use?

What is My Credit Score

To understand credit scores, we have to start with the credit report. Your credit report is just a financial record of your past and present activities. Credit card providers, banks, utility companies or mobile phone providers give information about you to credit reference agencies on a monthly basis. This information includes things like whether you have applied to take out any new loans, how regularly you are paying off the debt you already have, whether they are taking you to court over unpaid debts and so on. This is your credit record. The agencies will then take the information on your report and generate a score. Each agency does this slightly differently, so it’s less important to pay attention to the exact number. Instead, look at the grading you are given, which ranges from “very poor” to “excellent”.

Lenders consider both your credit score and the details on a credit report when deciding whether to give you credit.

Other Factors Affecting Credit Score

1. Affordability – many people believe that the higher your salary, the higher your credit score. That’s not strictly speaking the case. Lenders are more interested in how much money you have left over after all your essentials have been paid for. If money is tight – whatever your salary – lenders are going to worry that you will not be able to afford payments.
2. Credit cards – lenders are interested in what percentage of your available credit you are using. If you have one card and spend up to the limit each month, this is viewed negatively even if you pay it off. Having a few cards with available credit which you are not using ensures you are seen as a better risk.
3. Bill payments – your gas and electricity suppliers or mobile phone company will all share information with the credit reference agencies about whether you are paying on time. Late payments will go against you.
4. Loyalty – credit agencies give higher scores to people who have been with the same bank or building society for years. If you change your current account, then your credit score might dip until a few months’ payments have been made from the new account.
5. Frequent application – applying for multiple loans or credit cards in a short period will negatively affect a credit score as lenders may perceive you as desperate.
6. Association – if you have a joint bank account or mortgage with someone else, any debt which they are in can affect your credit score too.
7. Online gambling – credit reports might have information about where you spend your money as well as how much you spend. Payments to multiple online gambling sites are a huge red flag for lenders.

If you have recently applied for a job which involves credit checking, identity verification and other pre-employment checks, it can be a confusing time. Many of us are confused about our credit score or credit report, and concerned about what might be disclosed to our potential employer. Worrying about your credit score can be understandable but ignoring it won’t make it go away. A bad credit score may have significant consequences, but improving it is within your control too.

Take Control and Find Your Credit Score

The three main credit referencing agencies in the UK are Experian, Equifax, and TransUnion. Each of these three credit bureaus are legally obligated to provide you with your credit report upon request, free of charge. This basic credit report typically just contains the basic details of name, address, and any finance outstanding. More detailed reports are available, and many websites or apps offer a free trial period (typically 14 days) before requiring payment. This will show your credit score number.

Poor Credit Score

There are lots of reasons why you might have a poor credit score. Some of these are:

• Out-of-date information, such as an old address you have moved from.
• Not being registered to vote at your current address.
• Limited or no credit history, if you have recently moved to the UK or have just turned 18.
• Excessive credit – someone who regularly reaches or exceeds the credit card limit.
• Lots of loan or credit applications in a short time period.
• Missing payments or defaulting on loans.
• Bankruptcy or CCJs (county court judgements).

A growing issue is people who are “credit invisible”, estimated at around 5 million in the UK by Experian. These are people who just don’t have enough information on their credit record to allow the credit agencies to form an opinion about them.

Improving Your Credit Score

A poor credit score is not permanent and can be improved with time, commitment, and responsible financial management. If you can boost your credit score, this gives you a wider choice of loan products, and potentially better interest rates too. There are some very simple steps anyone can take to help improve their credit score:

• Register to vote on the electoral roll at your address.
• Regularly check your credit report for errors and ask the credit reference agency to fix any mistakes you find.
• Get your name on household bills, for things like gas, water, or cable TV.
• Pay your bills on time, and in full. Use reminders or set up direct debits if you struggle to do this.
• Pay more than the minimum payments on your credit cards, ideally paying the full balance every month, or as much as you can.
• Keep checking your credit report and flag up anything suspicious right away – identity theft is a growing problem and can seriously affect your credit score.

Having a bad credit score doesn’t mean you can’t get credit at all. It may just mean you have a restricted pool of credit options and might pay a bit more in interest until your score improves.