Do you know what the bankers see – and think – when they take a look at your credit record?
If the answer’s no, then it’s time to get hold of the latest copy of your credit file – it will be one of the smartest financial moves you make this year.
Because getting to grips with your credit record could mean you can bag the best financial deals.
Ignore it, and you risk paying thousands of pounds more to borrow – or at worst being turned down for a mortgage, loan or credit card.
Don’t worry – you are not alone if you haven’t checked your credit file. Less than 10% of us have ever done it. So here we explain what your credit score is and why it’s a key element of your life when it comes to money.
And we give you six simple steps to help you get your head around it.
Why is it important?
You might not think it’s a big deal, but you’d be wrong. Your credit score and record have a major impact on your money.
It’s the basis of your entire finances, the thing all lenders use to decide whether they will give you access to credit and what rate of interest they will charge you.
It can also help you spot early signs of fraud, before crooks leave you deep in debt.
A decent credit record could easily save you £8,000 or more in mortgage costs over five years – that’s more than £130 every month.
And, importantly, it’s totally free for you to access, so there’s no excuse not to keep an eye on it.
Although most of us spend time trying to budget, ensure our bills get paid and keep a close eye on our bank balance, we don’t know what our credit score is.
What is my credit record?
There are three main credit reference agencies in the UK – Equifax, Experian and Callcredit. Each maintains details of how you manage your money on your Credit Record.
It shows any borrowing you have now, your repayment record, levels of debt on credit cards and overdrafts, and how you have managed your money in the past. This all creates a report on the state of your finances past and present.
For example, it will detail all your credit card and loan balances and will flag up if you’ve missed repayments in the last six years.
It also shows if you’ve made any applications for finance – credit cards, loans, hire purchase or even a mobile phone contract.
It’s important you read through your own record to ensure all the information is correct as it’s possible for inaccurate details to be recorded which could have a major impact on whether you get approved for a loan and the amount of interest you will be charged.
The interest rate on a £150,000 mortgage for someone with a good credit record is just 1.96% over five years with Yorkshire Building Society and costs £633 per month.
But if you have a poor credit record you could easily pay rates of 3.6% or more with monthly payments costing more than £760 per month – a difference of £7,700 over the five years.
Everything you need to know about credit reports
What is my credit score?
This is a three digit number calculated using the information on your credit report.
The range of scores depends on which credit reference agency you use but typically it’s from 0-700 or 0-1000. The higher the number, the better.
Lots of factors affect your score including missed bill payments, unauthorised overdrafts and being rejected for credit applications.
Each credit reference firm will have slightly different categories but they are broadly similar. For example with Totally Money your score will fall into one of four categories as follows:
- 0–120: Poor – You are unlikely to be accepted for credit, but there are ways you can improve your score.
- 121-420: Fair – You are likely to be accepted for a range of credit offers.
- 421-825: Good – You are likely to be approved for credit at good rates.
- 826-1000: Excellent – You are likely to be accepted for credit at the best rates.
It’s worth pointing out that lenders don’t make their decision solely based on your credit score – they will have their own separate checks they make too (often referred to as a scorecard).
However, a high score usually means you’ve got a much better chance of getting your application agreed.
Here are six ways to boost your score:
1. Sign up
There are a number of options to choose from. We’d suggest signing up with at least two of the following for their free services:
- experian.co.uk (or the full report free from totallymoney.com or www.moneysavingexpert.com/creditclub)
- noddle.co.uk (free)
- equifax.co.uk (or free from clearscore.com)
Some credit reference providers will try to tempt you into an enhanced service alerting you about potential fraud on your account.
This may appeal, but it can cost you about £15 a month.
2. Check for errors in your details
One in three people who have checked their credit report have found errors from lenders on their file, according to research from Amigo Loans.
If you find anything inaccurate get in touch with the credit reference agency and either get them to dispute the mistake for you or contact the lender direct and get them to correct things.
This is vital as mistakes could cost your dearly. Ensure you are registered on the Electoral Roll at your current address. Some lenders may turn you down flat if they can’t confirm where you live.
If you have had credit problems through special circumstances such as losing your job, family bereavement etc, you have the right to explain this on your report by adding a notice of correction to any late payments from this period.
3. Note your score and understand what it means
Once you’ve got your score, what does it mean?
Make sure you understand your current situation and how it can impact your chance of borrowing money – take steps to improve it as follows…
4. Take action immediately
Close accounts you no longer use. A lot of unused credit (eg high credit card limits you haven’t used for ages or cards you had forgotten you even had) may negatively affect your rating. It can also make you more vulnerable to fraud.
If you had financial links to other people which are no longer relevant (such as an ex-partner) ask for them to be removed from your records.
Financial ties, such as a joint mortgage or a bank account with a partner, will appear on your credit report as an ‘association’ to your other half – and being tied to someone else means their credit rating could affect yours.
Try to keep the balance on each credit card at less than 25% of your credit limit.
5. Ways to improve your score
You may have a low score because you haven’t taken out any credit or have had money issues in the past. One way to improve it is to take out a credit card and make regular repayments.
It may sound strange, but lenders are looking for proof you are a good bet and can make repayment on time and clear debts in full.
There are credit builder cards that can help, but the rates are high. You must ensure you pay the statement off in full every month – that way it won’t cost you a penny.
Don’t spend beyond your means – put a couple of regular payments, say for petrol, on it each month. Managing the card responsibly will gradually improve your credit score.
6. Check regularly
Once you’ve made the effort to check your credit report and are working to improve your credit score, keep up the good work.
Many providers will email you your report and/or score every month. Keep an eye on it – it’s a good habit to adopt and should become part of your money management.
Top money stories
Source: Read Full Article