Understanding your credit score - What's a credit report?
If there's one area of personal finance that's far too often overlooked it's your credit report or credit reference.
Whilst it usually forms the basis of how much you can borrow and at what rate few people are really aware of how to read their credit report and how a lender will interpret it.
If you have had credit of one form or another it will almost certainly have been recorded and information shared with the main credit reference agencies such as Equifax & Experian.
When you apply for credit your application is usually cross checked against a report from these agencies which provides them with information about your outstanding credit balances, credit available, payment history and various other pieces of information such as whether the listed address is one where you are registered to vote.
This will be used in conjunction with demographic and statistical data to give the application a credit score, which is a method for predicting credit risk based on past lending experience.
There are many misconceptions about credit scoring and credit reports, see below for some of the most common;
- Credit Blacklisting
There's no such thing as a credit blacklisting, different lenders accept different levels of risk which they assess from your report, if you keep struggling to arrange credit ask us why and we'll help you find out.
- My house is blacklisted
Many people believe it's down to a former occupant of their property.
Whilst the house you live at is used to check your identity you shouldn't benefit from moving house, check the financial connections section of your report for errors but this is largely a myth.
- It's someone else in my house
Your credit score should never be affected by an individual you have no financial connection to (i.e. a shared account such as a business partner or spouse).
You can check the financial connections section of your report but again this is a common myth.
- Bankruptcy lasts for one year
Whilst it's true that you could be a discharged bankrupt after one year this could continue to affect your credit score a lot longer.
- It's based on income
Your credit report is a reflection of how you handle your credit related finances and while a lender will look at your income its more about how you manage it.
One area of a credit report that may give rise to some of the myths listed above is financial connections.
If you have held a joint finance account with anyone in the past you will likely have a financial connection to that person.
If they have bad credit history and you do not, and you have struggled to get credit then it may be linked to a financial connection.
If you are no longer financially connected to someone for example an ex partner then you can request that the credit reference agency removes the link to that person.
What will affect your credit score
Credit scoring is a method of judging credit risk using a combination of your credit report and statistical data along with business strategy to control the profile of a bank's borrowers'.
This means that not just your credit report alone will affect your ability to raise finance.
If you are looking to borrow very high multiples of your income, or have a small deposit, or are purchasing non standard property for example then the risk to the lender is greater so your credit history as a result will need to be better.
The more high risk elements that are combined such as poor credit history, high borrowing levels and small deposit's the greater the likelihood that an application will be declined.
To raise your chances of being accepted try to limit the number of risk factors that you pose.
For example if your credit history is less than perfect and your deposit is quite small try and find a property which is not stretching your maximum loan value, and which is a standard construction type rather than a flat for example.
Likewise if you are trying to borrow very high income multiple try to place a larger deposit or polish your credit history prior to trying to get finance.