Make 2012 the year you get to know your credit report

posted by in Budgeting

James Jones is Head of Consumer Affairs at Experian and works on a range of initiatives to help promote public understanding of credit report-related issues.

credit report sample from Experian

Sample credit report from Experian

I know that for many people the checks that take place when we apply for credit are a bit of a mystery.

Indeed, for some the process is intimidating enough to set pulses racing. Myths and misconceptions abound. Am I on a blacklist? Will checking my information lower my credit rating? Will my record show a recent credit refusal?

Thankfully, the answer to all of these questions is a resounding ‘no’ and credit checks really aren’t as daunting as you may think. Let me explain…

Credit reference agencies

The majority lenders use credit reference agencies (CRAs) to share factual information with each other about the credit their customers have and how it is being repaid. The vast majority of this information, which is updated monthly, is actually positive because most people pay their credit back on time.

The agencies combine these records with information from the public registers, such as electoral roll, court judgments and insolvencies, to produce your ‘credit report’. There are three CRAs in the UK: Callcredit, Equifax and my company, Experian. We don’t keep these records forever by the way – credit reports generally stretch back six years.

So all of this means that when you make a new application the lender you contact is able to get your permission to put your credit report under the microscope, to help them assess your suitability for new credit.

They will usually factor in other sources of information too, such as the details on your credit application form and any details they might have about you already if, for example, you’ve been a customer before.

The assessment is far from guesswork. Most lenders use a statistical process called ‘credit scoring’ to boil down all of this information into one single number, based on how customers with similar details have behaved in the past.

This number is often called your ‘credit score’ or your ‘credit rating’ and, importantly, is unlikely to be the same for any two lenders. The upshot is simple – there’s a good chance a lender will offer you credit if your score reaches its predetermined pass mark.

Refused credit

Being refused credit can feel like a smack in the face and, believe me, we’ve all been there. If you have credit refused – because of credit scoring or any other reason – the lender should tell you the main reason, though you may need to ask. They should also let you know which CRA(s) they consulted.

Contrary to popular belief, lenders don’t tell the agencies what decision they’ve reached, so this isn’t recorded on your credit report. But your report will show that you applied for credit.

To prevent fraud, lenders won’t tell you what your score is or exactly how they have calculated it. But, in general terms, all lenders are looking for the same thing – creditworthy customers.

A healthy credit record will help demonstrate your creditworthiness and therefore help you to get credit when you want it. It will also help you access the best deals, which are often reserved for customers with the best credit scores.

So it is sensible financial practice to review your credit report on a regular basis and certainly before applying for new credit. Think of it as your credit CV!

You can get a one-off credit report from each of the CRAs online or by post for just £2. The agencies also have more detailed online services available for additional fees, such as credit monitoring and credit report scores. The monitoring services often begin with free trials, which are very popular.

People often ask me for advice on building a healthy-looking credit report and what to look for when reviewing your report. So I’ll sign off with my top tips to help you build a great credit report. Here goes…

  • Use some credit sensibly. Don’t take on more than you can afford, stay within agreed credit limits and make agreed repayments on time. Lenders typically shy away from people with blank credit histories and those with a string of maxed out credit cards and missed payments.
  • Space out any credit applications. Multiple applications suggest fraud or desperation.
  • Register to vote. Lenders use it to confirm your name, address and residential history.
  • If you do take on more debt than you can afford or your circumstances suddenly change, seek help quickly by contacting your lenders and, if necessary, a provider of free debt advice.
  • Get into the habit of reviewing your credit report on a regular basis, checking for the following:
    • Make sure everything is accurate and up to date. Query anything that isn’t
    • Review financial links to other people and ask for any outdated links (e.g. to an ex-partner) to be broken
    • Look for accounts you no longer use and arrange to close them
    • Arrange to explain any past missed payments using a ‘notice of correction’ if you think it might help for lenders to know the background.
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  • brad

    My personal reflection on the credit application process (& subsequent credit scoring) is that it’s something that’s there to protect the lender as well as the borrower. There were a few times when I was knocked back for credit that I was really, really mad about. I realise now that they were just saving me from myself as I headed down a dangerous spiral of overuse of credit cards. I can look back now with a bit more of a calm head and actually grateful of those decisions!

    Thanks, you have a lot of great information on your site. Very interesting reading.

    • Thank you for your comment – there’s certainly that side to credit applications as well. It might seem unfair sometimes (perhaps because it’s impersonal) but it’s there to protect both sides.

      Good luck with the blog – we’ll be reading it again!

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  • pat clay

    can you remortgage when on a dmp

    • Hi Pat and thanks for your question.

      You can remortgage whilst on a DMP but your eligibility may be affected by your credit file. If you’re on a DMP with us, just give us a call and we can look at your options.

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  • Hi

    i will have three catalogue accounts paid off in full by April, i have been told if i close them it will go against me and look bad on my credit report, i have also been told to close them but ask the companies to put a note on credit reports saying settled and closed by customer, can you tell me which one is true??

    Thank You

    Marie

    • Hi there Marie

      Once you’ve cleared your catalogue debt this April, the creditors should update your credit file in the next six months and state that you’ve settled the debt. if you were to stop or reduce payment, this would also be logged on your credit file and affect your credit scoring adversely. my advice would be to persevere with the payments as you are so close to the finish line. When the catalogues are paid, it would be a good idea to take the money you were paying towards them and instead set that aside for expenses such as clothes, gifts and anything else you may have relied on the catalogues for.

      Hope this help

      Best regards

      Rachel

      • Marie,

        Closing the mail order accounts is unlikely to have a significant impact on your credit score, as long as you have other credit accounts open. When they carry out a credit check, lenders like to see recent evidence of you managing credit well. There is no need for a note on the accounts either. Your report won’t say why the accounts closed.

        Kind regards
        James