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The words “credit score” may fill some people with dread. Others may have never come across this phrase. Whether you’re aware or not, credit agencies keep information on more than 30m people in the UK. This includes details of bill payments and credit arrangements, from mortgages to mobile phones, loans and credit cards, with the repayment history.
These reports are used by banks, building societies and other lenders to help them decide whether you are an ideal candidate to lend money to. Companies also use the reports to determine the interest rates for any loans made.
Those who have borrowed money in the past and shown they can make repayments on time have more chance of making a successful application.
If your report is less than squeaky clean, it could cost you. Banks have been stung badly in the past by being too free in approving loan applications and losing money through bad debts. That’s why they have tightened their lending criteria to reduce their number of high-risk borrowers. Only the owners of the cleanest credit files are typically granted the best deals on credit cards and personal loans – mortgages too.
Checking your credit history
Getting hold of credit files has become increasingly important for anyone planning to apply for credit, as lenders typically will not divulge the reasons behind any rejection.
There are several credit rating agencies and they measure you slightly differently. Equifax, Experian and Callcredit have their own way of illustrating your credit history. When you apply for credit each lender scores you on their criteria, in addition to the information they might get from the three agencies.
You can check it for just £2, but Experian, Callcredit and Equifax all have subscription services that are more prominent on their websites. They are free for an introductory period – just remember to cancel before the period runs out and you’re charged. Alternatively, Noddle is a free service.
Keeping your credit history file squeaky clean
This is good practice if you need to borrow money in the future. Whether you want a new mortgage, personal loan or just a new mobile phone contract, it’s important to have a glowing report. Lenders like reliable, responsible customers.
Here are six ways to ensure you protect your credit score:
1. Be organised
If you don’t manage your accounts properly and miss payment dates for utilities or other debt repayments, it will be visible to other creditors. This could impact future credit applications. Missed or late payments indicates that you’re either financially stretched or lack responsibility in repaying debts, which means they are unlikely to view you as a decent candidate for further borrowing.
2. Check and close old accounts
Close credit or store card accounts you no longer use, as new lenders will wonder why you want another line of credit if you already have plenty open. Make sure all old accounts are debt-free. Owing a few pence on an old catalogue account or not clearing a mobile phone bill could cost you dear.
3. Check your report
Millions of us have never seen our credit report. But this is a mistake because it’s worth making sure that all the information held about you is correct.
Where information is wrong, you will need to contact the credit expert, explain the problem and ask for it to be corrected. Where you have missed a payment through a genuine problem, you can attach a “notice of correction” on your report explaining why payments were missed if there were special circumstances such as losing your job or family bereavement.
4. Don’t make multiple applications
Every time you apply, it shows on your record. While it won’t spell out if you were rejected, multiple applications for credit cards suggests your applications are unsuccessful which looks bad. Even just two applications in a short space of time could dent your credit score, making it even harder to qualify for a loan.
5. Separate finances
Joint finance with a partner will merge your credit status whether it’s a mortgage or finance on a new sofa. If you separate or divorce a partner, make sure you write to tell the agencies to avoid their potentially bad debts affecting you in the future. Ask agencies for a “financial disassociation” form.
6. Make sure you’re on the electoral roll
Not being on the electoral roll can cause problems when you apply for credit because lenders use it to check your name and address – and to combat fraud. Make sure each time you move, you update your local authority straight away. It’s a small detail that could make all the difference when you come to apply for credit.
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Money Means is a news and information series written by independent financial and consumer journalists and experts. FSCS launched Money Means in 2016 to help give people clear and useful information about personal finance, to increase their understanding and confidence when dealing with money.