An introduction to credit scoring

A credit score is a three-digit number that can determine whether a loan application is accepted. Borrowers with lower credit scores are often charged higher rates of interest.

Of course, we don’t do that at Central Liverpool Credit Union. We prefer to see our members as human beings, not numbers. We obtain credit scores, but a low score is not a reason to turn someone down. And we never charge a borrower more because of their score. Past savings and loan repayment histories are more important.

But better scores do help people get better deals on bills, like phones, gas or electricity.

Obtaining your credit report

Credit scores are provided by the three main Credit Reference Agencies, Experian, Equifax and TransUnion (formerly called TransUnion).

Individuals can contact Experian,Equifax, or TransUnion to obtain a copy of their statutory credit report. This, usually free, copy of a credit file is different from the subscription services a borrower can also sign up to. Terms and conditions should be read carefully. Obtaining a more detailed report sometimes comes with monthly fees and marketing from lenders.

The Money Advice Service has produced information about checking your credit report.

There are many factors that determine whether your score is bad, fair, good or excellent. A score can vary from month to month.

We’ve listed five things a borrower can do to improve their score below.

Improving a credit score

Everyone is different. The tips provided below are a general overview of actions an individual can take to improve a credit score. The Money Advice Service also has a guide to improving a credit score.

1.Pay everything on time

Most Credit Reference Agencies report a series of numbers next to a  credit account. An account ‘status’ of ‘0’ shows payments are up to date.  A status of ‘1’ shows that the account is one month in arrears. If you miss several payments in a row, the account might show as a default. Defaults can reduce a credit score significantly.

If credit accounts are paid on time this improves a credit score. Points are deducted for missed payments.

It’s important to note that different kinds of services are considered to be credit accounts, including gas, electricity and mobile phone accounts. Some landlords and water companies might report rent arrears to a Credit Reference Agency. Stopping paying a mobile phone contract can result in a default which significantly harms a credit score.

If lots of payments are missed and a borrower becomes subject to a County Court Judgment, Debt Relief Order, Individual Voluntary Arrangement or bankruptcy the credit score will fall significantly.

2.Have plenty of accounts

Lots of up to date accounts helps. Borrowers managing multiple commitments with payments on different days shows commitment and ability to repay. But beware. Owing too much compared to income might show that a borrower is over-committed. This can then reduce the credit score.

Interestingly if someone has very few accounts, perhaps because they’ve never needed to borrow before, the credit score is unlikely to be very high. This is because there’s no record of them being able to pay a debt back.

3. Only use a small proportion of credit card and overdrafts

A credit score can increase when credit is available but unused. This suggests that a borrower uses credit cards and overdrafts to manage peaks in expenditure, rather than spending on items that they cannot really afford. Borrowers constantly at their limits will see their credit scores fall. For example, a credit card with a limit of £500 and a balance of £50 will help with the score. But a balance of £450 will probably be driving the score down.

4. Re-register on the electoral roll

It is a criminal offence not to register to vote. But rolling registration has made this harder. Voters must register each year. If they don’t, they will drop off the register. The electoral roll is reported to all the Credit Reference Agencies, even if the voter has opted out of the public register. It is used to help prove identity. It shows stability in residency.

You can register to vote online.

5. Stay put; don’t move home, don’t move job

Lenders like stability. Knowing someone is staying where they live make it easier to maintain contact with a debtor. The likelihood of someone running away on their debt reduces. Long residency applies to people renting their home as well as those with mortgages. But people in rented accommodation will rarely have credit scores as good as owner-occupiers.

 

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