Your credit rating can help determine whether you are successful in applying for a loan, mortgage or credit card. It is based on data compiled by credit reference agencies.
What is a credit reference agency?
Credit reference agencies are companies who compile relevant information taken from financial institutions, credit providers and public records such as the electoral roll and county court judgements.
They use this information to produce credit reports which they subsequently sell to lenders and credit providers. The three main credit reference agencies in the UK are Experian, Equifax and Call Credit.
Who uses credit ratings?
Lenders use credit ratings to help decide whether to offer credit. They may also use the credit rating to help determine the rates and conditions of any credit offered. Lenders are under no obligation to offer credit and will use credit ratings to help determine the potential risk and profitability of an applicant.
Lenders will also take other sources of information into account before making a decision on credit. This includes the information on a credit application form, which will typically include personal details such as income, home address and family circumstances. Applications for a personal loan may also ask for the purpose of a particular loan.
Lenders may also take past dealings with the company into account. There are, however, data protection rules that may limit what information different parts of a company can share.
What information is on a credit report?
Credit reports contain details of your credit history. These include the date that any past or current credit accounts were opened, the credit limit or loan amount and details of any missed payments. Account details usually stay on your report for six years after an account is closed or a loan settled. If you clear a credit card balance but forget or otherwise fail to close the account, the details will remain on your report.
Agencies record credit searches every time a company or other organisation looks at your credit report. This means that every time you apply for credit, that application is recorded. Whether the application was successful is not recorded, although lenders may be able to work that out based on the credit accounts you currently hold.
Public records such as county court judgements, house repossessions and bankruptcies are also collected. These are usually kept for six years – in the case of a discharged bankruptcy, this should be wiped six years after the date you were declared bankrupt, not six years after you were discharged.
What information is not on a credit report?
Credit reports do not contain details of criminal convictions, medical history or personal information such as race and religion. Details of family members should not be included unless you have joint credit accounts.
Salary and earnings are not recorded. The name of your current account provider may be recorded but details of the account are not, unless there is relevant information such as use of an unauthorised overdraft. Savings accounts do not appear on credit reports as they are not a credit product.
There is no such thing as a 'credit blacklist', although having a poor credit rating can certainly affect your chances of getting credit and affect any terms that you might be offered.
What factors can damage my credit rating?
A number of factors can have a negative effect on your overall credit rating. These can include...
• Bad credit history
Missed or late payments can badly affect your credit rating. Defaults and County Court Judgements relating to debts can also have a major negative effect.
• Frequently changing address
Moving a lot can affect your credit rating. In general, credit reference agencies look at addresses lived in over the past three years. If there have been frequent changes or if you have lived at your current address for less than six months, it may have a negative effect. Moving house once, especially if you are a home-owner, is unlikely to have a major impact.
• Multiple credit applications
Making a lot of applications for credit in a short space of time can raise a red flag. Lenders may suspect that you have been turned down elsewhere or are desperate to obtain credit.
• Not being on the electoral register
The electoral register is one of the places all the credit reference agencies check. Even if you do not intend to vote, the fact that you are not registered can have an adverse effect.
How do I see my credit report?
The three major credit reference agencies offer various credit report services to individuals, but you have a right to see the 'statutory credit files' held on you by these agencies. These can be viewed online or paper copies can be ordered. There is a fee of £2 for each credit file.
If you think there are factual inaccuracies in the data, you can ask for the information to be removed or changed by contacting the agency directly. You can also add your own comments in the form of a 'notice of correction'.