Understanding your Credit Score
Debt is often described in negative terms. But borrowing money, or ‘taking on debt’, isn’t necessarily a bad thing. Manageable debts, that you can comfortably pay back over an agreed period, are often necessary in order to take that next step in life.
It’s only when debt repayments become unmanageable or unaffordable that debt becomes a problem.
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What is a credit score?
Getting a handle on your finances can be difficult, but the more you know, the better decisions you can make around tackling your debt. You can find out your credit score quickly and for free online.
Often referred to as your credit rating and credit ranking, your credit score is a collection of data compiled by third party organisations to indicate your creditworthiness to potential lenders. It will include things like:
- Your current total amount of debt
- Details of unpaid debt
- Details of any defaults
- The amount of credit you have available, for example available credit on your credit card.
What impacts my credit score?
In general, your credit score is an aggregate of individual scores based on your past financial conduct. For example, if you have a lot of debt and a history of defaulting, your score will be on the low side. If you have a history of sensible borrowing and always clearing your debts quickly, your score will be higher.
How you handle your household finances will also have an impact. For example, if you’re always late paying your council tax or gas bill, this will impact your score.
Things that may damage your credit score include:
- Bankruptcy – This can affect your score for up to six years. Think very carefully before filing for bankruptcy
- Insolvency – There are various types of insolvency such as IVAs, Protected Trust Deeds, Bankruptcy and Sequestration (Scottish Bankruptcy), each affects your score
- Not being on the electoral register – Improve this quickly by adding yourself to the electoral register
- Late or missed bill payments – Use Direct Debits or standing orders to keep on top of bills
- Access to a high level of credit, for example having multiple credit cards – Close unused credit cards and use balance transfers to consolidate credit card accounts
- Having no credit history, for example if you’ve just moved to the UK or have just moved out of your parents’ home – Address this by registering utility bills in your name and ensuring they’re paid on time
- Regularly checking your credit score or applying for credit – This can be a sign to lenders that you are desperately trying to access credit, which suggests you’re already in difficulty. Only check your score or apply for credit when you genuinely need to.
What doesn’t affect my credit score?While there are lots of things that can affect a person’s credit score such as bankruptcy and sequestration, other more common factors do not have an impact on how companies view your suitability for finance:
- Bank savings
- Student loan debt, unless you’ve defaulted
- Rent arrears, unless referred to a debt collection agency
- The credit score of your address – it’s a myth that moving into a home where the previous occupants had a bad credit score can affect your own score
- The credit score of your spouse or partner, unless you have shared bank accounts or loans
Where can I check my credit score?
There are three main UK credit reference agencies and a number of free places to check your scores.
The largest credit reference agencies in the UK all offer some type of free check. They are:
- Equifax – https://www.equifax.com/personal/education/credit/report/how-to-get-your-free-credit-report
- Experian – http://www.experian.com/consumer-products/free-credit-report.html
- Call Credit – http://www.callcredit.co.uk/consumer-solutions/your-credit-report/free-credit-report
Free credit checks are convenient, but they are only free for a limited period of time. It’s important to remember to cancel your subscription unless you wish to continue to have access to your details.
What should I look for on my credit report?
- Mistakes – any debts or missed payments that aren’t yours. You can query these with the agency holding the information.
- Missing or incorrect information – double check your address history and look for details of credit cards that you’ve since closed, but are recorded as being open.
- Debts that have been settled – it can take time for credit reference agencies to update your details, so make sure they have done this before applying for credit.
Would a Trust Deed affect my credit score?
If you are struggling to repay your debts and have missed payments, it is likely this will already reflect in your credit rating.
The Trust Deed itself is not on your credit file. However, once payments are stopped, creditors can register a Default Notice which will remain on your file for up to six years.
A Default Notice is a letter from a creditor advising that payments have been missed on the account. This typically happens 3-6 months into the arrangement. It can be identified by the following statement at the top of the Default Notice – ‘served under section 87(1) consumer credit act 1974’. It will allow a period of 14 days to bring your account up to date or the default will register.
Would an IVA affect my credit score?
If you are struggling to repay your debts and have missed payments, it is likely this will already be reflected in your credit score. The IVA will appear on your credit file for six years. At the end of your IVA we would suggest that you contact the credit reference agencies to ensure your IVA is now complete.
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