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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We are simplifying our loans

Later this week – and before launching online loan applications – we are simplifying our loan products.

Member loans

We want to reward savers with a reduced rate of interest.

If you’ve been a member of the Credit Union for more than two years AND have more than £500 in savings you can apply for a Member Loan.

You can apply to borrow up to three times your savings balance.

If you need more than three times your savings you should apply for an Opportunity Loan.

Opportunity Loans

You can apply for an Opportunity Loan, regardless of your savings balance or length of membership. New members can apply as they join.

Loans are based on affordability, but as a rule of thumb you can apply to borrow up to one month’s income. We will always take into account your personal circumstances and prior borrowing history.

The interest rate charged depends on the amount you borrow. You can  top up a loan after six months’ payments.

To apply for more than £5,000 you must be a homeowner.

You do not have to use the loan for home improvements. However, if you want to undertake expensive renovations in your home – perhaps to cater for a growing family – then a homeowner loan can help fund this work. Improving your flat or house can also make the property more attractive to potential buyers as well as increasing its value.

Business loans

For members who own businesses needing working capital or help with cashflow. Our business loans are available for sole traders and limited companies, including social enterprises.

We’ll be introducing online applications for business lending later in the year. In the meantime if you want to find out more contact us.

Applying for loans online

From April you will be able to apply for a loan online.

We will always welcome people into our offices. But from April you will be able to apply at a time and place of your choosing, including from your mobile without the need to download an app.

We’ve made this process as simple as possible. And to reduce paperwork, we will be using Open Banking.

Open Banking is a secure way to securely grant a regulated financial services organisation time-limited access to your bank account transactions. If you choose to provide this access, you no longer need to send in your bank statements to the Credit Union. Loan applications can be made entirely online. Decisions are quicker.

You’re protected

We’ve been taught to never share our account details. That’s still good advice in many ways, however the difference with Open Banking is that software and security systems give you the option to share your account information securely. Data is encrypted and usage is tracked. Only companies regulated by the Financial Conduct Authority can access your information.

How it works

When you apply online for a loan you may be asked to provide your bank statement. You still have the option to bring these into the office, but that will delay your application. Alternatively, if you have an online account, you can select to provide this added secure information over the internet. This enables us to provide a much quicker decision.

If you choose to do provide online access you will arrive at a secure portal where you select your bank account and log in using your usual online banking credentials. Your log in details are not shared and remain secure. No one will see them, they are not accessed by the Credit Union or stored in any way. They are fully encrypted.

How we use your data

We receive a summary of your income and expenditure in the form of a monthly budget. This covers the previous 90-day period. The connection to your account remains open for 90 days. If you apply for a top up loan within three months, we do not need to get you to logon again.

More information

The Money Advice Service has more information about Open Banking.

If you have any questions, contact us

Christmas loans

Christmas loans from Central Liverpool Credit Union: There’s only 11 weekends until Christmas!

The cut-off date for Christmas loans is 26th October. If accepted a loan received by this date is guaranteed to be paid in time for Christmas.

We will still look at loans for Christmas until 20th December. However there is no guarantee that these will be paid out before 25th December.

Its never too early to start budgeting

Have you worked out your budget?

The average household will spend £475 on gifts, £110 on food and drink, £30 going out, £20 for travel and £17 on decorations this Christmas.

The Money Advice Service has produced a calculator to help you work out how much you will need.

Its important to agree (and stick to) a spending limit.

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