Every year thousands of people in the UK have their applications for credit declined. Whether applying for a credit card, loan, or mortgage, the most common reason for this rejection is a poor credit score.
Having a good credit score is essential for anyone wanting to be accepted for credit, but how can you build (and maintain) a good credit score? And, if your credit score is bad, how can you rebuild it so you start getting accepted for credit again?
What is a credit score?
It is a commonly held belief that each and every individual has a credit score, and lenders use this score to decide whether or not they should accept a particular application. Of course there is some truth in this view, but it also oversimplifies the actual situation considerably.
In the UK, unlike some other mature western credit markets, there is no universal credit score which lenders use when assessing applications.
Every lender uses their own proprietary application scoring system. These scoring systems are complex algorithms which encapsulate the business model of the lender, their appetite for risk, and their revenue generation methods. Because each scoring system is unique, one lender might accept an applicant whilst another could decline the same individual.
So why do people worry about their credit score?
Although each lender uses a unique method for scoring applicants, they all use broadly the same data inputs within their algorithms. Perhaps the most important of these inputs is the information that is sourced from credit reference agencies.
There are 3 main credit reference agencies in the UK (Callcredit, Experian, and Equifax), and every lender must use at least one (as they have a legal duty to ensure they do not over-indebt people). The credit reference agencies’ primary function is to capture and process data on potential credit applicants, which helps inform lending decisions.
Although the data captured by individual reference agencies varies slightly, they all tend to source the majority of it from the same three primary sources.
- The Electoral Roll – which confirms an individual’s name, residence, and residential status
- The Register of Judgments, Orders and Fines - this confirms whether an individual has been subject to any CCJs (County Court Judgements), IVAs (Individual Voluntary Arrangements), or Bankruptcy Orders
- Commercial data – This is shared by banks and other credit suppliers to reference agencies so they can establish a picture of how indebted an individual is, and whether they are in default with any of their liabilities (enabling them to alert other lenders)
Beyond simply collating data, the credit reference agencies also process it, looking for financially linked individuals (married couples, cohabitees, people with shared financial agreements, etc), as well as recording when searches of an individual’s credit file (usually when they apply for credit) are made.
Aside from their primary business-to-business function, the UK credit reference agencies also offer services directly to the public. They have a legal duty to share their data with individuals it is held on, but they also offer premium services. These tend to be charged on a monthly basis and give users ongoing access to their credit file.
As part of this service, each credit reference agency attempts to ascribe a score to the individual – as a way of helping them track changes in their likelihood of being accepted for credit products. It is these credit scores that many people mistakenly believe determine whether or not they are accepted for credit. They are not. Each lender uses data from reference agencies, but they each treat the data differently, so no one universal credit score is the determinant.
Nevertheless, although credit scores are in and of themselves not a determinant, they are compiled using the same source data that lenders use. Therefore, improvements to a credit score are likely to be reflective of an individual’s improving likelihood of acceptance. Thus they are a good proxy, given that the exact acceptance criteria are trade secrets.
How to improve your credit score
Before thinking about the specific actions that can be taken to improve a credit score, it is worth thinking about how and why lenders assess applications.
The primary goal of lenders is to reduce, if not avoid completely, the risk of a customer defaulting on the money they have borrowed. Lenders do have routes for recourse if an individual defaults, but they try to avoid these. They prefer to lend cautiously from the outset to reduce their exposure.
Cautious lending means assessing the risk each applicant exposes them to, and rejecting those determined to be too risky. Perhaps the most common way lenders predict risk is by assessing an individual’s past behaviour. People who have borrowed responsibly in the past are more likely to do so in the future, and those who have struggled in the past are likely to do so again.
Therefore, when trying to improve a credit score, individuals need to exhibit the behaviour of people who are considered to pose a lower risk.
There isn’t usually a ‘quick fix’ for repairing a credit score, but in some instances there can be. Quick fixes only occur when there is an error in a credit file which can be quickly remedied – so before any credit building activity can be undertaken it is important to acquire your credit reports.
Get your credit reports
Every UK credit reference agency has a statutory obligation to provide an individual with the data they hold on them upon request, and charge no more than £2.00 for the service. However, credit reference agencies also tend to offer trial periods for their paid services, which can be used to obtain the same data for free, if used carefully.
n.b. Be sure to cancel your subscription within the trial period, as charges for these services can mount up very quickly (some can cost nearly £200 per year).
Check your credit files for errors
Although rare, errors are made in credit reports. Depending on the specific error, they can have a profound impact on an individual’s credit score. For instance, an entry incorrectly indicating an unpaid bill or an unchallenged fraudulent credit application would indicate to a prospective lender that an individual is in financial distress, and therefore an unattractive prospect.
Fixing credit file errors can rapidly improve a credit score.
To do this, the first point of contact should be the creditor organisation that initially reported the data incorrectly. If they agree that the data is factually inaccurate they should amend it, and the change will be reflected in the next update file they send the reference agency. If they report that their information is correct the error must be raised with the reference agency/agencies concerned. This can be a far more drawn out process, including written statements on behalf of the individual concerned. Ultimately, issues can be escalated to the ICO (Information Commissioners Office) who are able to arbitrate, but this is tends to be in exceptional circumstances.
Actions which help build a good credit score
Assuming there are no errors in a file, the only way to improve a credit score is to exhibit the behaviours of good prospects. Positive steps that can be taken to do this include the following;
- Getting on the Electoral Roll – Although electoral turnout in the UK is low, having a record on the electoral roll demonstrates to lenders that an individual is permanently resident in a particular place, and not going to run off with their money. If you are not on the electoral roll you can apply here.
Pay on time and in full - Ensure you pay your current creditors on time and in full. Failure to do this will be recorded on your credit file, and will make additional credit far harder to obtain. Direct debits can be very useful for this if you are forgetful and miss payment dates.
n.b. Creditors are not just financial institutions. Mobile phone contracts, monthly insurance payments, and utility bills all feed into your credit report too.
- Remove incorrect financial links - Request that credit reference agencies remove your financial links with those you are no longer associated with (ex-partner, old housemates). This must be done formally using a form called a ‘notice of disassociation’. If you are currently associated with someone who has a bad credit score you should try to remove any financial ties. Joint bank accounts, mortgages and loans all establish a financial link. In some circumstances it will be difficult to sever your association, so you should encourage them to start to remedy their own credit score, as this will be equally beneficial for you too.
- Avoid unnecessary credit applications - Multiple credit applications made in quick succession tend to be associated with individuals who are struggling to pay their bills, or people who are being rejected by successive potential lenders. Do not apply for products haphazardly.
- Use credit building products – A bad credit score does not necessarily mean that all credit options are removed. Certain products exist which have been specifically designed for people with bad credit, who are looking to rebuild their credit score. Credit building credit cards are one such product. They offer lower credit limits than conventional credit card products and their rates of interest tend to be considerably higher. But, if they are used wisely, they can help build the credit history that demonstrates the responsible approach to credit that other lenders are seeking. In the instance of credit building products, they should be used sparingly and the minimum payment must be made in full every month – failure make the minimum payment will make a poor credit score even worse.
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