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When you apply for a homeowner loan, mortgage or credit card, the lender will check your credit record as part of processing your application. A poor credit score means ‘high risk' in the mind of the lender and can make it difficult to obtain a loan, lenders who lend in these circumstances tend to be more expensive because of the high interest charged.
It is common for lenders to request credit reports from the three main credit reference agencies, Experian, Equifax and TransUnion and use the mean score (average). Credit reference agencies are not responsible for assessing the information they hold, nor do they maintain a 'credit blacklist'. It's the job of the lender to assess the information and decide whether to lend or not. Although different lenders might work from the same credit report their scoring systems may be different, so you could be refused credit by one company and accepted by another.
The files that credit reference agencies maintain on all of us contain a variety of financial information; for example, a missed payment on your credit card will be visible on your credit report for 3 years, while a CCJ will be visible for six years. They also maintain details of bankruptcies, IVAs and information from the electoral roll.
However, that these credit reports can contain account histories that are incorrect, outdated and incomplete. Credit reference agencies do not verify information they receive from your creditors, the simply log it. Believe it or not, it is your responsibility to ensure your credit report is accurate and up to date.
An adverse credit rating can be expensive. Most loans and around 25% of credit cards charge a higher interest rate if you're credit rating isn't exactly perfect. So, it's in your interest to ensure the details on your files are up to date and correct.
What information is used to calculate your credit score?
Credit scores are calculated on historical data:
1. Settlement history
2. Total outstanding debt
3. Length of credit history
4. Type of credit (secured or unsecured)
5. Frequency of borrowing.
N.B. Items 1 and 2 count towards 65% of your overall credit score.
So, based on historical data, your credit score provides the lender with a reliable indicator as to whether a loan should be granted or refused.
Have you been Refused Credit for no apparent reason?
If you have been refused credit it is most likely the result of an adverse credit report. Many credit reports contain inaccurate information which will affect your ability to borrow in the future and, in some cases, your ability to gain employment especially if you work in the financial sector.
A common reason for being refused credit is that you simply can't be found on the local electoral role. If you haven't registered yet you should correct this as soon as possible.
How do you check your credit score?
The lender you approached has no legal responsibility to tell you why you were refused a loan or supply any information regarding your credit score. However, the lender is obliged to give you the name, address and telephone number of the credit reference agency (or agencies) they used. You have 60 days after receiving the denial notice to request a free copy of the report. Gaining access to this report should tell you everything you need to know and catch any instances of identity theft.
How do you request a report?
To request a credit report write to one of the credit reference agencies giving your full name, previous name if married, address and how long you have resided at that address. Also include a copy of a recent utility bill. Also include any address where you have lived over the last 6 years.
Equifax
Credit File Advice Centre
PO Box 1140
Bradford
BD1 5US
http://www.equifax.com/
Experion
Consumer Help Service
PO Box 8000
NOTTINGHAM
NG1 5GX
http://www.experian.com/
TransUnion
P.O. Box 6790
Fullerton, CA 92834
http://www.transunion.com/
It's likely that each credit agency holds slightly different information depending on which agency your creditors report chose to. For this reason it is important that you check your credit report with all three agencies.
Once You Receive the Report
Check the credit report carefully and contact the credit reference agency immediately if you spot any errors in your personal information requesting they rectify the inaccuracies.
What if the credit report is inaccurate?
Although Experion and Equifax both offer an online process to challenging any incorrect information on your credit report it is quicker to write to these companies by registered delivery. Spend time putting everything together before you contact any credit reference agency.
1. Make a copy of your most recent credit report and highlight any missing, out of date or incorrect information.
2. For identification purposes include at least 3 forms of identification like a recent utility bill in your name at your current address, a recent bank statement, a copy of your driver's license or passport or your social security number.
3. Carefully piece together proof of any errors in the report and include supporting or corroborative documentation. Things like checks or receipts for cash and credit card statements that show when payments were made.
4. In case of identity theft, include any police reports you have.
5. If there is related court judgments or bankruptcy include all documents or discharge papers.
6. Attach a cover letter stating that you are disputing your credit report, clearly state the reasons why and reference your supporting documents as required.
7. Be meticulous.
8. Do not send original documents make copies of everything.
9. Post it registered delivery so that you have a delivery receipt.
What happens now?
The credit reference agency will commence investigating the items in question within 30 days. They will contact any creditor who has supplied credit information you claim to be inaccurate. The creditor is then required by law to investigate your complaint and report its findings. If the disputed information turns out to be inaccurate, the creditor must notify all nationwide credit reference agencies, so they all can correct the information in your file. During this process log every phone conversation and keep copies of every letter or e-mail that you send or receive.
If your challenge is successful, the credit reference agency will send you written confirmation and a free copy of your updated report.
In the simplest terms your credit score is your credit history calculated in figures. There are many methods which can be used to calculate your credit score but the most common method is the FICO. FICO was developed by the Fair Isaac Company and is the preferred method used by most lending companies. Your credit score determines whether a lender will approve your application or not or whether a lender will give you less rates on your payments or not.
Credit scores or FICO scores generally range form a low of 340 to a high of 850. Ideally, you should aim for a score of at least 700 or more. If you get a score of 600 and below, creditors will likely consider you as a high risk borrower.
Knowing how your credit score or your FICO score is calculated will help you become more aware of your spending and your payment habits. Let's consider the break-down of categories used to sum up your credit score.
What comprises your credit score?
35% of your credit score depends on how good of a payer you are. If you make it a point to pay all your bills promptly, you should have no problem obtaining the complete 35% of your credit score. However, if you're in the habit of delaying or skipping payments, or if you defaulted on some of your debts, your credit score will also be affected.
30% of your credit score is calculated based on the level of your debts. Do you always maximize the use of your credit limit? Were there instances that you've even exceeded your credit limit? If so, then you'll likely get a low score on your credit utilization. Hence, borrowers are advised to keep spending below their credit limit. As much as possible, keep your balances at least 50% lower or even less of your credit limit
15% goes to the length of your credit history. How long has it been since you started your credit report? The longer your length of credit history is, the better your score will be. This is because, the more information your creditors can get out of your credit report, the better they can gauge you as a borrower. This is why it is very important to establish a good credit report as early as you possibly can. Also, this is the reason why you should always think twice before closing accounts that you've had for a long time.
10% of your credit score is based on inquiries. If you're in the habit of submitting credit card applications just for the heck of it, your credit score can be affected. Also, whenever a creditor denies your application, it can also have an impact on your FICO score. Thus, before submitting any application, see to it that you really intend to get an approval out of it.
The other 10% of your credit score is based on mix of credit. If you have a credit card account, a car loan, a mortgage loan and various types of insurance policies, it will show your flexibility and dependability as a creditor. If you've been able to manage all these different types of accounts without any problems on your payments, then you'll likely get a perfect score on this category.