Everything you need to know about credit scores and reports

Category: News

Your credit score affects your opportunities to borrow money and how much borrowing will cost. Yet, many people don’t check their credit report.

Three in ten people never look at their credit score and 25% are unaware of the factors that contribute to the score, according to research commissioned by Experian. With around a fifth of people likely to apply for some form of credit in 2021, understanding your credit report could increase the chances of your application being accepted and save you money.

Why does your credit report matter?

Lenders use a credit report to assess how risky you are to lend money to. A credit report includes a credit score, which pulls together numerous factors to rate your overall financial stability.

Lenders will use this information when they decide whether to lend to you. It will also affect the terms and interest rate you’re offered. The risker you are viewed to be, the higher the level of interest you’ll need to pay. This means the cost of borrowing will increase too. As a result, not understanding your credit report or taking steps to reduce negative factors can end up costing you money.

Not all lenders will use the same credit report or score. Each credit reference firm has their own scoring system. In the UK, there are three main agencies: Experian, Equifax, and TransUnion. However, all credit reports will include the same basic information, including:

  • Personal details, such as your name, date of birth, and current and previous addresses
  • Active credit accounts, for example, mortgages, credit cards and loans
  • Details of late or missed payments
  • Credit agreements, such as a mobile phone contract and car finance
  • Whether you’re registered on the electoral register
  • Public record information, for example, Country Court Judgements, bankruptcies, and individual voluntary arrangements

If you’ve never, or rarely check your credit report, it’s a good idea to do so even if you’re not hoping to borrow money soon. It can take some time to improve your overall score, so acting now can provide you with more opportunities in the future.

Here are seven things you should know about your credit report and score.

1. Errors can occur and you should ensure they’re corrected

Errors on credit reports can and do happen. Whether an incorrect address has been listed or it wrongly suggests you’ve missed a payment, this can affect your credit score. If there are mistakes, you need to contact the credit reference agency to let them know. Without checking your report, harmful mistakes can go unnoticed for years.

2. Several factors can affect your credit score

Your credit score doesn’t provide information on certain aspects of the report. It brings them together to provide an overview of how financially stable you are and, therefore, the level of risk you’d pose to potential lenders. Among the factors that affect your credit score are how much available credit you’re using, missed repayments, whether you’re on the electoral roll, and how long you’ve lived at your address.

3. There is a difference between hard and soft credit searches

There are two types of credit searches, and it’s important to know the difference.

The first is a soft credit search. This would provide an overview of your credit report and doesn’t leave a mark on it. It may be used by lenders assessing your eligibility, for example, when you apply for a mortgage in principle.

The second is a hard credit search. This will be used by lenders when you apply for credit and they must notify you that they’ll be carrying out a hard credit search. Hard credit searches appear on your credit report.

4. Your partner’s credit score can affect yours

Your partner’s credit score doesn’t automatically affect your credit score, but it can. If you have shared financial products, such as a joint bank account or mortgage, their score and negative factors on their credit report can affect you. As a result, if one of you has negative factors on their report, it can be a good idea to keep finances separate. You should also ensure you aren’t financially linked to ex-partners.

5. Negative factors on your report aren’t permanent

Even negative factors don’t stay on your credit report forever. In most cases, negative factors, including missed payments, bankruptcy, and County Court Judgements (CCJ), will remain on file for six years. If you need to improve your credit score, it can take some time as it considers your long-term stability. However, it is possible, and it can improve your access to credit in the future.

6. Numerous applications can affect decisions

Another factor affecting your credit score is how many credit applications you’ve made. These will appear as hard credit searches on your report. Several hard searches in a short period can affect a lender’s decision. This is because it can indicate you’ve rapidly increased available credit, or a credit application has been rejected by other firms. A lender won’t be able to see why a hard credit search was carried out or the outcome of it.

7. It’s free to check your credit report

All three of the main credit reference agencies allow you to check your credit score and report online for free. This won’t leave a mark on your credit report and you can check it as often as you like. If you want a more comprehensive information overview and a printed copy, credit agencies will charge a small fee for this.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.