How a Credit Rating Works
Your credit rating is a detailed history of all the credit you currently have or have had in the past.
There are two main credit reference agencies in the UK; Equifax and Experian.
These agencies compile information on your credit history which is then checked by the lender you’ve applied to in order to determine the level of risk to them in letting you borrow the money.
Your credit rating contained in these reports is just one of the criteria used by lenders in determining whether or not your application for credit should be accepted or refused.
Each lender tends to have their own individual set of criteria on which they base their lending decisions, and your credit rating is merely a component part of the overall process.
What information is contained in my credit report?
Your credit report contains information on all the borrowing you’ve applied for as well as details of any credit that’s outstanding.
You can order a copy of your credit report from Experian or Equifax for a small fee and see for yourself exactly what it contains.
It’s worthwhile to check your credit rating if you haven’t done so before as it may contain information about you which is out of date or incorrect.
If your credit report is inaccurate, then you can contact the lender in question to ask them to amend or remove an entry from your report.
With many people in the UK worried about identity theft, there are options available from the credit reference agencies which alert you by email when a change is made to your report; there is a small monthly charge for this service but it can provide you with peace of mind.
How your credit rating is calculated
There are a number of criteria used by lenders to calculate your credit score and they will use this information to help them make a decision on each borrowing application you make.
The following critical factors are all important when it comes to calculating your credit rating;
- Payment history including missed or late payments
- Amount you currently owe
- The length of your credit history
- The number of new or recent credit applications made
- How many credit accounts you have in total
- What type of credit accounts you currently have e.g. bank overdrafts, store cards etc
When deciding to lend money or not, it’s all about the level of risk as far as the lender is concerned, so the better your credit rating, the less risk you pose of defaulting on payments.
Summary
It’s your responsibility to make sure your credit rating is accurate and one of the most important things you can do is to ensure you are on the electoral register.
Many lenders will simply refuse an application if you’re not registered to vote as they use this as a reliable means of verifying your identity.
Each application you make for credit is recorded on your report so it’s important not to make too many in a short space of time as this will damage your overall score.
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