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Martin Lewis: what you need-to-know about credit scoring
Credit scoring has become a key part of our financial lives. It impacts far more than most people think.
It’s not just about whether you can get mortgages, credit cards and loans, but can also effect contract mobile phones, monthly car insurance, bank accounts, even if you can pay energy bills the cheapest way.
Even if you're accepted, we live in a 'rate for risk' world, so credit scoring then dictates what you pay too. Many people get unstuck by this.
They apply for today's record cheap rates, but find they're charged more.
So here’s what you need to know...
You DON'T have a universal credit rating - there's no blacklist
This is a myth. In the UK, there's no universal credit rating or score, there's no blacklist of banned people. Each lender scores you differently and secretly. So a rejection by one doesn’t mean a rejection by all.
Their aim is to see if you match their profitable customer wish list. A key part is assessing the risk of non-repayment. If that's high, many won't lend to you; but some specialist lenders will like you more as they can charge you high.
Yet even those who are good risks can be rejected, because the lender thinks you won't make it money. Or perhaps you're applying for a credit card, but it wants to cross-sell mortgages, so scores you on how likely you are to get one.
What they know about you
Lenders assess you with 3 key pieces of information:
1) Your application form. Many underrate how crucial this is. Be consistent on each application form, eg, job title, salary. Regular inconsistencies can trigger rejection as you hit a ‘fraud score’ trigger.
2) Any past dealings with you. A lender you've banked with can interrogate your behaviour far more than others. This can work both for and against you.
3) Your credit reference files. These come from either Equifax, Experian or Callcredit and contain info on the electoral roll, court judgments, what credit applications you've made, products you have and if you've paid on time.
However, they don’t know everything. They don’t know your criminal record, medical history, speeding fines, salary, student loans, declined applications and more – don’t get too conspiracy theorist about it.
How to make yourself more attractive
Getting accepted for credit is like going on the pull - like people, different lenders find different things attractive. It’s more art than science, but there are some cosmetic changes that work for most.
Here’s 10 tips:
1) Get on the electoral roll. If not, getting credit's tough. Check if you're on it and apply via www.aboutmyvote.co.uk. If you're not eligible, write a notice on all the credit files that you’ve proof of residency.
2) Stability's good. If possible, put a landline, not mobile, on applications.
3). Beware over applying. Too many applications for products especially in a short space of time can hurt. So if you’re about to get a mortgage, don’t apply for lots of credit cards just before. One problem though is often the only way to know what rate you’ll get is to apply, so the system is anti-shopping around.
I’ve given evidence against this at parliament on many occasions, but little has been done. So to help I’ve built a free www.moneysavingexpert.com/eligibilitychecker tool which gives you odds of getting different credit cards so you can hone and reduce applications.
4) Time it right. Problems stay on your file for 6 years, applications for 1 year. So if you can wait until they've lapsed to apply, it should boost your score.
5) Never miss or be late on repayments. Small errors can hurt large. Set up a direct debit to be sure you never miss. Do this even if just for the minimum repayment, then you can call up and pay more on top each month, see it as an insurance policy.
6) Don't let 'paid-for credit scores' overly worry you. In recent year’s credit reference agencies have started to flog these, but don’t take too much notice. They’re only based on your credit file, not the other info lenders look at, and remember each lender scores differently. One may see cancelling a credit card as good as it reduces available credit, another as bad as it’s closing down a long term relationship.
7) Payday loans can kill mortgage applications. Some mortgage underwriters simply won't lend to anyone with payday loans. There are special tricks those looking for mortgages need, full help in my Free First-Time Buyer’s Mortgage booklet at www.mse.me/FTB.
8) Deal with unfair defaults. First go to the firm that put them there and ask it to remove them. If not ask for a ‘notice of correction’ to be added to your credit file where you can explain briefly why it’s unfair and appeal to the Financial Ombudsman.
9) Check for address errors. An old, active, but unused mobile phone registered to your old address could even cause a mortgage rejection.
10) Don't withdraw cash on credit cards. This is both expensive and seen as evidence of poor money management - avoid.
These are just the start, for more credit boosting tips see www.mse.me/creditrating.
How to (re)build your creditworthiness
Credit scoring aims to predict future behaviour based on your past. Those with a poor history thus do poorly; as do those with little credit history, as then predicting's tough.
The perverse solution is to get credit and use it well. The easy route is a specialist credit rebuild card (otherwise you'll be rejected).
These have awful 30%+ APRs. So just do £50ish/mth of normal spending, then repay IN FULL each month, preferably by direct debit so there's no interest (and never withdraw cash). After six months or so, things should start to improve. Card firms that offer these include www.capitalone.co.uk, www.aquacard.co.uk, www.luma.co.uk and www.barclaycard.co.uk.
Get PAID to check your files
Even small errors on your www.experian.co.uk, www.equifax.co.uk and www.callcreditstatreport.co.uk files can kibosh applications, so check all three line by line annually and before key applications, eg, a mortgage. While you'll see you've checked it on your file, lenders won't, so it won't impact your score.
While you've a legal right to check each file for £2, you can sign up for a month's credit monitoring trial, which lets you do it for free (remember to cancel). Better still, sign up via a cashback site like Quidco or Topcashback and you can be paid for signing up to the trials.
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