What is a Credit Score?
In simple terms, a credit score is a number which expresses the perceived relative credit-worthiness of an individual derived from an analysis of their current and historical financial behaviour and other characteristics.
What are Credit Scores Used For?
Credit Scores can be used for a number of purposes, but the vast majority of credit score searches are used by potential lenders (credit card issuers, personal loan suppliers, mortgage providers, banks, mobile phone network operators etc) to assess the likelihood a borrower will default on monies owed.
How are Credit Scores calculated?
Credit scores are calculated in a number of different ways, depending on the weight given to the different elements that form the basis of their calculation. These elements include:
Publicly Available Records
These are used to determine that an individual has a permanent address, has not recently been declared bankrupt or been subject to debt recovery proceedings from previous creditors.
- Electoral Roll - which confirms an individual's registered address
- Register of Judgments - which records CCJ's, court orders and fines for 6 years
- Individual Insolvency Register - which maintains the UK record of current bankruptcies, IVA's (Individual Voluntary Arrangements), FTVA's (Fast-Track Voluntary Arrangements) and iBROs (Interim Bankruptcy Restrictions Orders)
- Credit Industry Fraud Avoidance Service - The CIFAS enables member firms to exchange information about fraud and/or fraudulent activity committed by or undertaken using individual's accounts or information
The past credit history of individuals is analysed to help understand whether an individual has demonstrated a good track record for payment:
- Credit Experience - How much experience of managing credit does an individual have (how many products have they had and over what period)?
- Payment History - Has an individual successfully demonstrated that they manage their finances to ensure that creditors are paid in full and when due?
Current Credit & Financial Situation
Elements of an individual's current credit situation are also analysed and are used to determine that an individual has a permanent address and has not recently been declared bankrupt or been subject to debt recovery proceedings from previous creditors:
- Current Credit Owed - How much the individual currently has outstanding for collection with their various different creditors
- Available Credit Lines - Regardless of whether they are being used or not, how much credit in total the individual could currently access (multiple open credit card accounts may impact your ability to acquire additional new products)
- Recent Credit Searches - Has the individual recently had a number of searches ('pulls') of their credit file? This could indicate that they are applying for a number of different products because they are in financial difficulty.
What is a good credit score?
Credit reference agencies use differing methods for conveying an individual's credit score, but typically the higher the relative number, the better the individual's credit score.
If I've never needed to borrow will I have a good credit score?
Individuals who have managed their finances in such a way that they have never needed to borrow are unlikely to have a good credit score, because they will not have built up a tracking record which demonstrates that they can manage credit offered to them.
Does a 'good credit score' guarantee access to the best products?
A 'good credit score' does not necessarily guarantee consumers access to the credit products they want. Businesses offering credit tend to be looking for individuals who are unlikely to default, but occasionally incur charges as a result of missed/late payments etc. as they are likely to make more money from these consumers than on individuals who always pay on time and in full.
Why might I have a poor credit score?
Often individuals will know exactly why they have a poor credit score. It may be that they have missed payments, had County Court Judgements against them, or failed to register themselves on the electoral roll to demonstrate that they have a permanent address.
However, credit scores are sometimes impacted by factors outside the influence of the individual. Most notably if individuals have a 'financial connection' with a third party, for example they have lived with another person or had a shared account or credit agreement, and if that third party has a poor credit score, then this could impact their own credit score.
If individuals suspect their credit score is being impacted by an incorrect association with another person, they can file a 'financial disassociation' form with the credit reference agencies to remove the connection.
How can I see my Credit Score?
In the UK, the Consumer Credit Act and UK Data Protection Act give consumers the right to access their Statutory Credit File for £2.00 per report. Given that there are 3 main UK credit reference agencies (Experian, Equifax, Callcredit), it costs no more than £6.00 for individuals to obtain all of their UK credit reports, which must be posted within 7 working days of receipt of the request.
Checking credit scores can often be done for free by accessing a trial from one of the more comprehensive 'credit report and identify theft packages' available through the credit reference agencies, but be sure to cancel your subscription if you do not feel the package is necessary for you or you are likely to incur fees far higher than the £2.00 credit agencies are legally entitled to charge.
Is my Credit Score the same with all three reference agencies?
The three UK credit reference agencies all access data from different places and do not necessarily communicate with each other - they are, after all, competing with each other to supply the most accurate data to the suppliers of credit, to help facilitate their processing of applicants and to reduce the potential for incurring future bad debts.
Who can access my Credit Score?
Businesses can only access the full credit report of individuals who give them permission to do so (although publicly available information duplicated in credit files - such as electoral roll data, CCJ's etc can be viewed through credit reference agencies). However, it is worth noting that businesses often obtain permission to access customer data held by credit reference agencies as part of the application for credit (without this permission they would be unlikely to agree to offer credit). This consent typically remains with the associated debt. So if a consumer ultimately defaults and their debt is sold to a debt recovery firm, the firm can legally continue to access the individual's credit report.
Rectifying credit file errors
Occasionally errors are made in credit files which can impact the overall credit score of individuals. If you believe that there is an error in your credit file you should contact the credit reference agency on whose file you have identified the error and ask them to correct it (contact details for credit reference agencies below). It should take no longer than 28 days to correct errors in a credit file.
Credit Reference Agency links
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