Credit Reports & Credit Scores

Your Credit Report and Credit Score, although closely linked, are totally separate and sometimes lead to confusion. So, what are they, how do they work and why do they matter?

Your credit report is a summary of your credit activities, both current and previous, and over typically the last 6 years. There are a few Companies that collate such information and provide it in the form of a report to whoever legitimately asks for it. This could be you as the individual to who it relates or a Lender who is being asked by you for a loan of some kind. Whoever supplies the report, you should expect them all to contain the same information, although this isn’t always the case.

Your credit report contains details of loans, credit cards, mortgages, hire purchase and other credit related accounts, such as your mobile phone and bank account, as examples. It will detail when the agreement started, the amount of credit (the loan amount or the credit limit for a credit card), your required monthly payment, the payments actually made and the number of payments required, or end date of the agreement. The information should all be accurate and factual. If you believe the information on your credit report is wrong, there are mechanisms you can use to have it corrected.

Perhaps more importantly to a new Lender, your credit report will also show details of any missed payments on any of your accounts. A missed payment will not always result in a formal Default notice being issued, but it can have a bearing on your ability to obtain future credit. A series of missed payments, or refusal to bring payments up to date, is more likely to see you in ‘Default’. If then pursued by the Lender through Court, it could result in a County Court Judgement, or ‘CCJ’, being logged against you. Generally speaking, the further a particular issue has progressed, the bigger the impact it will have upon your ability to secure future credit.

Your credit report will also contain details of any Debt Management Plans, Individual Voluntary Arrangements or Bankruptcy too. As these are higher on the ‘undesirable’ scale than a CCJ, even fewer Lenders will consider new loan requests. Any of the above issues, grouped under a heading of ‘Adverse Credit’, can affect you.

However, time elapsed since the event may help, whether it’s a missed payment or Bankruptcy. If you are currently Bankrupt, no Lender will consider you but, after 12 months, there are a few that might – dependent upon other factors, and some Lenders may wait 6 years.

Individual Lenders all set their own criteria to consider ‘Adverse credit’ cases. An outright decline from one Lender doesn’t automatically mean no Lender will consider you. It is fair to suggest though that those Lenders willing to accept such adverse credit are likely to charge a higher rate of interest for doing so, to reflect the higher perceived risk of further Lending.

This term can be even more confusing as it means different things to different people. A lot of the credit agencies that can provide you with a credit report, give you a ’credit score’ – typically 1 – 999 or 1 – 500 so you can gauge where you sit along the line of credit worthiness. Here lies the first problem: Let’s say you have a score of 499. Is that good or bad? With one Company, rating up to 500, it would be deemed excellent but with another using a scale up to 999, it’s more mediocre. These numbers and scores are purely for reference within any given report, are based upon the supplier’s own scale, and are intended to be a reference point for you to follow with them on a month by month basis. You may also receive ‘tips’ on how to improve your credit score but improving your score from one month to the next doesn’t automatically mean you’ll qualify for a mortgage.

These ‘scores’ should definitely not be confused with ‘credit scoring’ run by Lenders, although the underlying principle is very similar. The above number is meaningless to a Lender and doesn’t directly impact upon their decision. When a Lender ‘credit scores’ you, they take factual information from your application and from these reports in order to give each aspect a score of their own. Broadly speaking, you just have to achieve the score the Lender sets as a ‘pass’ in order to be accepted – whether you’re one point below the acceptable threshold or a hundred, it’ll be a ‘no’ from that Lender.

Clearly having adverse credit recorded against you will impact matters for you, whichever ‘score’ we refer to. However, you can still fail to attain a sufficient score with lenders for other reasons. Arguably worse than having some adverse credit history, is having no history at all. If you have never borrowed money before, never taken out a credit card, or possibly even a bank account, there will be no track record of your habits. Lenders like to see people have borrowed money, within reason, and paid it back. You may sometimes hear “Get a credit card if you want to help get a mortgage”. Whilst there may be some truth in this, it isn’t without danger too. If you apply for a mortgage, having only just taken on a credit card, the Lender will see someone with a credit facility but have no idea how it will be used, or abused. If you’ve had the card a year or more before the mortgage application, provided you’ve kept within limits, paid monthly and not missed any payments, then it can help establish you as a good borrower.

With some Lenders. There are many items that can improve your score which may not be immediately obvious, such as; having unbroken address history and being on the electoral register. Conversely, are you a guarantor for someone else’s loan? If so, how have they conducted their affairs? We hear of people who’ve ‘taken out a loan for their son / daughter to buy a car, because they can’t get a loan themselves but they’re responsible for it’. As far as a Lender is concerned, any loan in your name will be considered as part of your assessment.

Because different Lenders set their own pass marks and score your application differently, you can be declined by one Lender but accepted by another Lender minutes later. However, you do not want to be approaching too many Lenders as the credit checks themselves are often logged and, if a Lender sees several other checks, it can impact upon their decision. Whilst your credit report will not show the outcome of any Lenders decision, just that they ran a check, the cumulative effect of several checks may be viewed negatively by a Lender.

What should you do?

If you think you may have some adverse credit recorded against you, there’s no harm in you applying for a copy of your credit report from one of the agencies offering them. Indeed, a good broker may often ask you to do this before trying to place you with any Lender, especially if you think there may be an issue. If you find there is nothing untoward or do find some aspect of adverse credit on your report, it’s good for your broker to know. Rather than applying for a mortgage ‘blind’, a good broker will be able to first filter out Lenders that will not accept you. Apart from Lender’s credit scoring, many publish what adverse credit items they will and won’t consider.

We’ve seen clients who think they cannot get a mortgage be accepted, and of course clients that were unaware of credit issues being declined. The key thing is to find out if there are any issues.

Who should you get a report from?

As already mentioned, there are several firms that offer credit reports and many offer free trials or ongoing monthly access for a fee, typically in the region of £15 to £20 per month. As the information they contain should be factual, you would expect all reports to be identical. However, this is not always the case. Some human intervention with recording can lead to errors and discrepancies, but it’s good to know errors can be corrected if you contact them. Below is a link to ‘CheckMyFile’, one of these credit agencies. Unlike some Companies, CheckMyFile link to and draw information from a few different sources, including what you could class as the two larger organisations – Equifax & Experian, increasing the accuracy of the data. Some clients subscribe to the monthly update service offered but CheckMyFile also offer a free 30 day trial,** allowing you to get a snap shot of your record at that moment in time – great if you just want to confirm your situation.

Click here to explore your credit report

**After the free 30 day trial you will be charged £14.99 a month - cancel online at anytime.

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