Do we need to worry about credit scores?

So many people worry about their credit scores and whether doing certain things or making certain life choices will impact upon this figure

We’re telling you that there is no need to worry about credit scores.

Why?

Credit scores do not exist!

The truth is that there is no single universal number in the UK that goes out to lenders informing them how good you are considered from a credit score point of view. 

What you do need to focus on is your credit reference file. 

This is data that is used whenever you make an application for credit, whether you are on the electoral roll, who you are financially linked to, whether you have any county court judgements against your name, whether you are paying on time, what products you are buying on finance, etc and this data needs to be checked by you once a year!

How?

There are a number of companies out there who will help you to check your credit file. Companies such as Experian, Equifax and Transunion UK usually let you access your credit file and report for free. It is advised that you should check your credit files at least once per year. If you are ever rejected for credit, check your report before you go and apply again. 

Why are credit scores advertised as something so important?

At the end of the day, it is a money making activity created by these credit score companies. 

They are useful from the point of view of giving the consumer a loose indication on how a lender would view you as their customer. This is only one element that is taken into account based on a consumer’s credit history; the biggest element is whether you can afford the repayments.

We would advise that you do not worry about credit scores too much. Each lender gives importance to different elements and will search you on their own programmes/against their own measurements. Things like credit file, application form information, past dealings that it has had with you are all taken into account. One of the biggest and most important things is how they view you as a potential asset – are you potentially profitable or are you a risk?

Lenders want to make money from you. They absolutely do not want to lose their money therefore if you are deemed a risk you will be rejected for credit. 

However, given that all lenders use different elements to make their decision on whether you are a risk or not, if you are rejected for credit from one lender, you may not be rejected from another so do not despair. 

If you have been rejected for credit…

Ensure that you check your credit file before making another application with another lender. Check for any errors that may have made their way into the information. Also check that you are on the electoral roll and that you have not missed any payments that you have with other lenders. 

Ways to boost your credit file…

There are lots of ways to help boost your credit file and deem you more attractive to a lender. 

Ensure that you pay existing credit on time. Ensure that you actually have credit in the first place – lenders need to see that you are responsible with existing credit so you need to build a foundation first.

What is the point in being told your credit score?

It’s not totally pointless to be faced with a credit score that a credit score agency has given you. It provides a great indication of how likely it is that you will be successful at obtaining credit. 

The issue is that the general public have no idea how each agency works that figure out so we have to just view it as an indication only. 

What do lenders use to make a decision?

Whilst we are not completely sure on how they reach their decision, there are some things that are commonplace:

• Everything on your application form is used by the lender to work out whether you are an attractive prospect or a credit risk 
• Basic information such as your address, salary, family size, home owner status, job title, phone numbers and reason for the credit
• Any past dealings or applications that you have had with that particular lender
• Whether you are cited on the electoral roll
• Whether there are any court records in your name i.e. CCJs, IVAs, bankruptcy judgements and other court debt orders
• Search data which is records of other lenders that have searched your file when you have previously applied for credit
• Account data which is where banks, utility companies and other organisations use credit reference agencies to share details on all of your credit history and account behaviour over the past six years
• Any hard credit checks that have been carried out on your file
• Payday loan data is normally obtained nowadays too and the payday lender is legally obliged to share this information

Is there anything that these lenders do not know?

Yes. Plenty. The only information on your credit file is linked to financial data. 

• Information relating to race, religion, ethnicity is not held, nor is information regarding your medical history. Information pertaining to salary amount is not held, however you may have indicated a figure on the application form
• History relating to any savings accounts you may hold is also not held on your file. Although it is a financial product, savings accounts are not a credit product
• Criminal records are not present, nor are student loans, council tax arrears, parking fines, driving offences, declined applications or reclaimed charges

The takeaway is that although credit scores do not technically exist, they can be a good indication of where you stand from a credit risk/prospective credit perspective. Click here to read our guide on how to check your credit reference file for more information.