The Basics of UK Credit

What is credit? Credit is money available for a client to borrow. This can come in many forms such as an overdraft a loan a credit card or even a mortgage. In the commercial trade, credit is referred to as delayed payment for goods purchased i.e. when you purchase a washer machine but you pay monthly instead of up front.

For lenders (companies or banks) to allow you to borrow money as credit you have to be able to prove you have financial stability and are able to pay back the money borrowed. To determine this, a process known as credit scoring is applied.

UK lenders use credit scoring to help decide whether they should lend you money. The information you provide on your application form and your details held by the credit reference agencies, such as Experian and Equifax, are compiled to work out your credit score. Your credit score determines whether you get accepted for a particular financial product, the lower your score is the greater the chance the lender will reject your application.

For more detailed information on what is credit scoring and how to build or improve your credit score, click on the sign post opposite.

What is Credit Scoring?

'Credit scoring is a technique used to assess the probability that a customer will meet their financial commitments'

When you apply for credit, whether it is a current account credit card or even a mortgage the lender will assign a 'credit score' to your application. Your credit score will depend on a number of factors such as your credit history, outstanding debts and your ability to repay those debts. The lender tries to predict how much of a risk it is by allowing you to borrow up to a certain limit.

The lender will only accept your application if your total score reaches a certain level. If you don't score enough points then the lender may

• Turn down your application,
• Offer you a smaller amount than you applied for or
• Charge you a higher rate of interest.

Whilst each lender will score your application based on the services they offer and their own criteria, there are a number of general factors which will impact your credit score. Knowing the criteria could ultimately effect whether your application is accepted or declined.

1. Not on the Electoral Roll

If you are not on the electoral roll at the address on the application there is a high probability of rejection.

2. Bad Credit History

Past credit history usually counts for 35% of your credit score. Missed or late payments, County Court Judgements (CCJs) or defaults will have a negative impact on your credit report.

3. Continuity

Lenders like continuity. This applies to residency as well as employment. A score will be higher if you have been at the same address for 3 years or more. Your credit score may be affected if you have been at your current address for less than 6 months. This criterion usually affects tenants more than homeowners. Similarly lenders are looking for someone who has had the same job for a number of years. Ideally you want to have been in your new job for a few months before applying for new credit as lenders often ask to see the last couple of months pay slips when applying for a loan. Having bouts of unemployment between jobs will more than likely have an adverse effect on your credit score.

4. No or New Bank Account

Lenders will award maximum points if you have been with your bank for a number of years.

5. Too Many Credit Applications

Every time you apply for credit a search is made and will be recorded on your credit file. Multiple credit applications in a short space of time will negatively impact your credit score. Such applications may be perceived as someone desperately trying to obtain credit.

How to build your Credit Score

It's much easier to start from scratch than to repair black marks later on.

Your credit history is one of the main factors which will help to determine your credit score. It can effect whether you get a good job, a reasonable rate on your mortgage or even a lower rate for your insurance. One late payment, maxing out your credit cards or applying for too much credit at once can hurt your credit score for years.

Start from scratch - check your credit report

Credit reports are used to create your credit score; this informs the lender of your ability to repay credit should they lend it to you. Equifax and Experian are the major credit reference agencies who carry out these credit reports. Even if you have never applied for credit it is still a good idea to get a credit report as there could be mistakes on your file or your identity could have been stolen to open bogus accounts. Report any problems on your credit report immediatley.

Open a savings account

Lenders see accounts as a sign of stability.Opening a basic account is a step that is generally looked over but it will start to build your financial history.

Pay bills promptly

It is fundamental in building your credit score to always pay your bills on time, starting from now! A single missed or late payment can seriously affect your score. Setting up direct debits is the best way to ensure payments are not missed.

Apply for credit when you're a university student

Lenders are more willing to take a risk with you now than once you've graduated.Look for a credit card with a low annual fee and low interest rates.

Apply for a secured credit card

If you can't get a regular credit card, apply for the secured version. These require you to deposit money with a lender; your credit limit is usually equal to the deposit. Pick a card that;

• Has no application fee and a low annual fee
• Will convert to a regular, unsecured credit card after 12 to 18 months of on-time payments
• Is reported to both credit reference agencies.

If the issuer doesn't report to the credit reference agencies, the card won't help build your credit history.

Get a finance company card

Department stores that issue charge cards typically use finance companies, rather than major banks, to handle the transactions. These cards don't do as much for your credit score as a bank card (Visa, MasterCard, Discover, etc.), but they're usually easier to get. Only apply for one or two and make the payments on time and this could help boost your credit score.

Eight simple ways to improve your credit score

1. Check your credit report

2. Amend Information

   If any information on your report is incorrect let the credit reference agency know. If you haven't registered on the electoral role do so. If there may have been special circumstances which caused you to miss payments on a loan, you are usually able to write a short comment to explain why this happened. Lenders do not have to take this into consideration before making a decision of whether to accept your application but they might.

3. Protect yourself

   If you notice on your credit report a loan or credit application which you did not make you must report it immediately! You be a victim of the ever growing crime of identity fraud.

4. Keep things up to date

   Your credit report includes a section listing anybody with whom you share a joint account, mortgage, loan or credit card. These people are known as your financial associates. Lenders may also look into their credit histories when you apply for credit. If they have a poor record, you could be rejected. If you no longer share a joint financial agreement with someone you need to let the credit reference agencies know so they can remove this connection off the your credit report.

5. Ask for a 'Quotation search'

   Before making any formal applications ask the companies for a quote. If the company needs to check your credit report make sure they only do a quotation search. Lenders may interpret a lot of credit application searches as your applying for an unmanageable level of credit or they might even suspect fraud.

6. Tell the truth

   Do not lie or bend the truth as this creates a fraudulent application. It can stop you from getting credit in the future as inaccuracies show on your credit report.

7. Pay debts on time

   Paying existing debts on time will help show the lender you are in control and much more likely to meet future repayments.

8. Avoid credit repair agencies

   These companies are generally expensive and have you pay out for something you could do yourself. These companies can not change your credit report, look for ways of improving credit and talk to your lenders if you're having problems paying debts off.

All that is left now is to keeping checking your report. It does not stay the same throughout time so stay on top and make amendments where necessary.