Credit rating and its importance

Nobody can plan their life month-by-month or year-by-year, but having an idea on when you are likely to make the biggest credit application in your life – your mortgage application – can help you optimise your credit rating and help lenders to give you the best deals.

Many firms offer a free report which allow you to check your credit score and identify any issues which may deter potential lenders from offering you their best deals. The main providers are:

Planning ahead is important. Some discretionary spending is unforeseeable but there is little point, for example, saving and planning towards getting on the housing ladder, only to buy a new car on hire purchase the same year you are due to apply for agreements-in-principle from mortgage lenders. This could torpedo your credit file and make your application much harder.

So, what is a “good” score? For Equifax, this is deemed to be scoring over 420/700; for Callcredit, scoring 4/5 and for Experian scoring 880/999.

If you are not planning a big credit application in the near future, a few points here or there makes no real impact. Do not get obsessed with the score, but instead concentrate on the content of your report. Lenders’ decisions are not solely based on score but will be influenced by other factors too. Here are some of the ways you can further improve your profile:

Electoral Roll
Make sure that you are correctly logged on the Electoral Roll.

Credit Arrangements
Pay all of your current credit arrangement on time. Likewise, ensure you set-up all direct debits to pay off your debts each month. If you accidentally miss one of these payments by doing it manually, the mistake will stay on your credit file. Bad scores such as CCJs, bankruptcy, missed payments and defaults stay on your file for six years.

Your Credit Profile
Build your credit profile. In addition to the above, there have been some welcome recent developments which allow people in rental property - both private and social housing tenants - to enhance their credit profile by being recognised for consistently paying their rent on time. Now there is a way for these on-time rental payments to count towards your credit score through Experian’s Rental Exchange initiative. Notwithstanding the Bank of Mum and Dad, many first-time buyers will be renting for extended periods before being able to afford their first property. Providing your landlord participates in the scheme, you can sign up here. Only Experian offers this service at present but it is being considered by other providers too.

Rental Exchange can also be used by those in social housing in the U.K. Following excellent work by the Big Issue founder, Lord John Bird, social housing tenants’ rental payment data can now help give them fair access to consumer credit. This scheme has been widely praised by the cross-party Financial Inclusion Commission.

Asset Allocation
Review your asset allocation. If you are lucky enough to have built up cash savings, make sure you pay off existing debts before applying for any new credit. If not, it could raise question marks with the lenders’ underwriters.

Detail Longevity
Underwriters like to see longevity and stability in addresses and employment history. Gaps in employment, or multiple recent changes in employer may raise questions around your guaranteed monthly income, and therefore ability to pay back loans.

If you are planning to apply for a mortgage in the near future, consider the timing of a new job. Even the best laid plans can go awry however, so in lieu of longevity, ensure a solid history of pay slips and employer details are available upon request.

Partner Situation
Should you wish to link finances with your partner, you need to discuss the matter in depth before embarking on joint financial ventures. According to Relate and the Money Advice Service research, 30% of UK adults have settled with a partner who they later found out was in serious debt. One in five (18%) admitted that they have hidden their own debts from their partner. If one partner brings bad-credit baggage to a joint application, this will affect the credit rating of their partner. You should be talking about these matters and now is the time.

Credit Repair Companies
Consider whether you really need to enlist help from a “credit repair company”. Often you can do everything they claim to do.

Soft Enquiries
When you are researching loan providers and making enquiries over whether you are eligible, make sure these are “soft” enquiries rather than “hard” applications which stay on your credit file for a long time. “Soft” checks are increasingly prevalent and are often used as background checks when you apply for financial products – for example, the SynerGIS Bond.

If there is anything on your credit report you wish to challenge, raise it with the credit reference agency. They have 28 days to remove the bad information from your file or give solid reasons to justify its inclusion.

You also have an option to provide a “Notice of Correction” to the agency which is a statement (up to 200 words) allowing you to explain certain entries on your credit file.

The key message is to make sure you spare a few minutes every year to review your credit report. This will fully empower any credit applications and ensure you are not just blindly applying with your fingers crossed, hoping to get the result you need.

For further advice, extra information is available at the invaluable Citizens Advice, Which? And Money Advice Service sites.

Provided for informational purposes only. Not designed as advice. Speak to your IFA or tax advisor for advice tailored to your individual circumstances.

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