How’s your credit rating ranking? Giving it a boost can help you get approved more easily for finance. Read on with Cashfloat to explore how.
- What is a credit rating?
- How does a credit rating work?
- How to check a credit file
- Having a good credit rating means you’re more likely to be granted long or short term loans.
- Lenders look at personal information such as length of employment time and income, to determine someones credit rating.
What Is A Credit Rating?
Put in simple terms a credit score is an analytical tool used by lenders. They use it to assess whether an applicant for a card is a good or bad risk when for borrowing. They compile a complicated analysis of the previous borrowing and payment history, and the amount of debt already owed. The credit score gives information to a prospective lender to help decide whether you’re a bad or a good risk.
In addition to this risk factor, a credit rating can also determine what rate of interest they will offer you. Each lender has a different policy when it comes to credit scores. So, if one company turns you down, it doesn’t mean you will be met with rejection by all of them.
What is important is to find out why the application was met with refusal. Then you can take steps to address the situation. However, before looking at that option, let’s look at how this system began.
Why Can’t I Get Credit?
Have you ever wondered why some people find it easy to get a credit card, personal loan or a mortgage? Or why, even though you have a good job and salary, you’ve had an application for a card turned down? The answer might be in your credit history. This story features explanations about how this works and why you might be finding it difficult to get credit.
It’s certainly not a good feeling if you have had an application for a credit card turned down. That is, especially, if you don’t understand the rationale behind the decision. In this series of articles about credit cards, we have looked at many different aspects of this financial product.
In this article, you can find out how credit histories and credit rating came about. The article tells you what you can do to improve your credit score. We will also look at some myths that surround credit scores and how low scores can affect your financial future.
Hopefully, you can understand how the credit score system works. By implementing the tips on improving your rating will allow you full access to the benefits of owning a credit card.
Credit Rating Using FICO
The FICO scoring system started in 1989. A majority of lenders and banks use it to assess the risk of lending.
The FICO score is the basis for all credit scores of individuals. The Fair Issac Corporation created this system which is now used by most lenders. FICO scores go from 300 to 850 and the higher the score, the better the risk. Any number over 650 is considered ‘good’. Lenders also look at other information such as length of employment time, and also income. They take into account whether or not you have lived at your address for a long or short period. There are several other factors that can also help lenders to make a decision.
Categories Of The Fico Score
Below are five main categories of the Fico score you should know about.
There are five categories which influence a credit rating. One of these is the payment history. That is, how well you have repaid previous debts and whether or not you have any missed payments or paid late. Each time the person misses a payment or is made late it’s recorded on the credit history and stays there for six years.
This makes the situation of having borrowed money before and having paid it back on time comes in useful. Lenders will always be more willing to offer long or short term loans to individuals who can show that they’ve borrowed before and paid the funds back. The credit score takes into account the oldest loan, the newest loan and then an average is made.
The next category is the amount of money owed out of the amount of credit that is available. Having debt will not create a bad score. However, having used up all of the available lines of credit will. So, if you have maxed out all of your credit cards you are unlikely to be able to get more credit. This is opposing to someone who owes more money than you but still has some credit available. Having available credit makes you a better risk as a borrower.
A FICO score also takes into account what kind of credit has been given in the past. So, a good mix of credit which might include a personal loan, a mortgage and a credit card will help towards a good score. It would be better than having multiple credit cards, which demonstrate irresponsible borrowing.
The final part of the score is dependent upon whether there has been a sudden increase in applications for credit. Multiple applications for credit cards or any kind of instant payday loans within a short period of time shows as desperation. Therefore it will indicate to the lender that the applicant might have financial problems and could be a bad risk.
Why Do Lenders Use The Score?
These five categories along with the details that you disclose on an application form provide information the lenders need to decide whether you can borrow money. Credit card companies and other financial institutions have an obligation to be responsible lenders. This is to prevent customers from getting into financial problems. Using the credit score is just one of the tools at their disposal.
How Does A Credit Rating Affect Borrowing?
A credit rating does not remain the same forever. Don’t worry if your score is currently low and your application for a credit card is met with a refusal. It does not mean that this is a situation that will last forever.
The information that a credit history stores is important as it can affect your ability to borrow. However, not having a credit card is not the end of the world. Being refused a mortgage can mean the end of your dreams of owning a home. Keeping a credit score high is the best way to protect future borrowing options.
Checking Credit Reports And Files
You may be wondering about how lenders check credit reports and files. Let’s take a look at the process.
Credit Reference Agencies
There are three major credit reference agencies in the UK. Lenders decide which ones they will use to access details of a credit file. The three agencies are Experian, Equifax and TransUnion. The latest figures show that 76% of lenders choose Experian and 54% use Equifax with just 30% choosing TransUnion. So, a high percentage of lenders use both of the two more established credit reference agencies.
Credit File Information You Can Access
Credit reference agencies should allow you to see a copy of the current state of your file for a £2 fee. It is worth while getting a report from each agency as there may be slightly different information on each one.
A credit history will not hold details about income, a criminal record, council tax arrears, medical problems, student loans or savings.
The information in the report will show the following details:
- Financial links to others, e.g. joint accounts
- Footprints of recent searches
- Records of late or missed payments and any defaults
- Current debt obligations
- County Court Judgements
- Any Individual Voluntary Arrangements or a bankruptcy
- Electoral roll registration
What Is A Good Credit Score?
Lenders do not make decisions based solely on the credit score. However, it is also worthwhile and useful to know how the individual agencies score, and what is considered as good or bad credit.
Not all banks and lenders use all three agencies to check credit scores. Some banks will be happy to take results from just one agency. Natwest, and Royal Bank of Scotland are examples of banks who use all three agencies; Experian, Equifax and TransUnion, where-as TSB use only Experian.
Credit Rating – Summary
Credit rating and credit histories are a fact of life when it comes to borrowing money or getting a credit card. Having some knowledge of how the system works can only help to increase the chances of a successful application. So, take on board some of the information and tips which may improve your chances of a successful application. In Chapter 12b we continue to expand on this topic.