What's the Score With Credit? - lady with a laptop holding a credit card

What's the Score With Credit?

credit credit score

From how much you spend on your credit card to the amount of debt you carry, your personal finances should be just that, personal – but were you aware that the credit reference agencies are carefully tracking your every financial move. These companies collect data that can influence some of the biggest decisions in your life, from getting a new mobile phone or car to renting or buying a home. Yet often the first time you realise there’s an issue with your credit score is when you’ve just been rejected.

In the UK, three credit reference agencies – Experian, Equifax and TransUnion – collect, store and rate personal and financial information about you. This data is used by lenders as part of their decision-making process. A high score can make available the best deals on loans, credit cards and mortgages or a low one can lock you out in the cold. But in addition, this lucrative information is often sold on to other companies for a profit – and presents a tempting target to identity thieves and hackers.

For a system that can make or break our lives, we have very little control over the information gathered and research shows most are only dimly aware of the everyday actions impacting our scores. So, let’s take a closer look at how much we know about credit scores, how credit reference agencies affect our lives and explore ways to better work within a system we can’t seem to avoid.

The power of credit scores

Credit reference agencies collect information on every adult in the UK to form our credit reports. Each credit reference agency gathers a range of data, so our reports can differ from one agency to the next. However the personal data they aggregate come from three main sources: the industry – such as lenders and fraud agencies; publicly available data – including the courts and the electoral roll; and derived data, which an agency can find out from the information available to them, like a shared financial connection with a former partner who you opened a credit account with.

Your whole life is open to scrutiny – these companies know a scary amount of personal information including your name, address, date of birth, whether you’re registered to vote, how much you currently owe lenders, whether you’ve made late payments, how many times you’ve applied for credit, if you’ve passed credit checks in the past, had any county court judgments and if you have a joint account with any other people.

On the plus side, credit scoring is a way of objectively assessing the information held in your credit reports, distilling it into a number that banks, insurers, lenders and even sometimes employers rely on to make all manner of decisions. Financial companies, as well as other interested firms, pay credit reference agencies to access this treasure trove of data, which they use along with other information that you may have put in your application to score and help make judgements on how creditworthy you will be as a borrower, whether you can rent a flat or even pay for your insurance monthly. However, to give you a better idea of how lenders and other interested parties will view you, credit reference agencies produce their own version of your credit score that you can use to check where you stand before you apply. This is sometimes known as a soft search which does not impact in your credit report.

Are you in the dark about credit scoring?

According to research from Experian only half of people in the UK (53%) have ever checked their credit report and of those that have just 26% say they know their credit score,

– despite the various free credit report and score services available. Even then it’s not enough to just know your score. It’s also important to understand what’s moving it up or down, so you can take action to improve it. Most of us know the basic ways to boost our score, such as registering on the electoral roll or ending old financial relationships. But what’s the impact, for example, of paying your insurance annually rather than monthly? Does it matter if you max out your credit card if you pay it back in full? How bad is paying your electricity bill one day late? The answers can be hard to come by, so many of us are in the dark.

Consumer champions Which, worked with Experian to gather more detail and provide a quiz on their website

Why credit scoring can feel like a dark art

Ultimately, it’s up to lenders to decide who they are comfortable to lend to and, for the most part, this process is shrouded in mystery. There’s no universal credit score – each lender has its own system in place to decide whether or not to accept you, meaning you could be turned down by one, but successful with another. But it’s this complex modelling that means credit scoring can feel like a dark art and leave many feeling powerless or unwilling to even engage with their credit reports. Each credit reference agency and each lender will have its own criteria for how to calculate a credit score, but the three credit reference agencies have come up with an agreed list of factors that will usually have an effect.

These include: How long the person has lived at their address; The number and type of credit agreements and how they use those credit products; Whether the person has been late making payments; Whether the person has had any court judgments made against them; Whether the person has been bankrupt or had an IVA or other forms of debt-related arrangement. But do credit reference agencies always get it right? Sadly not, and the erroneous errors can have a significant impact that can take months or years to undo.

What’s the cost of being in the dark?

Many people only realise they have a poor credit score once they’ve been rejected for credit – and this can trigger a wave of rejections that can drag your score ever further down. Even if you are able to correct an error on your record, you may find it harder to convince other providers to remove rejections based on this mistaken entry.

A low score can mean you don’t get access to finance or are given a worse deal at a sky-high rate – and it’s not just your finances that are impacted. In some cases, landlords use credit reference agency information to make decisions about letting a property.

Your rights over your credit report

Firms don’t have to issue a customer with a default notice before applying a negative mark, so checking all three of your credit reports regularly is the key to spotting changes. If you spot mistakes or incomplete information, you can alert the credit reference agency which has the error, which will then go back to the lender to verify the data. It’s worth knowing that the credit reference agency won’t have the right to change the data without permission from the organisation that supplied it. So if a company digs their heels in or the firm is hard to contact because they have gone into administration, things could get tricky. If the data does turn out to be wrong, the credit reference agency will update its records accordingly. If the credit reference agency still believes the data is correct, they’ll continue to hold and keep it – although you can ask them to add a notice of correction to your file. A notice of correction is a small statement (up to 200 words) that you can ask a credit reference agency to add to your credit report to explain something that prospective lenders might call into question. However, credit files with a notice of correction cannot be assessed using automated credit scoring methods, Instead, they are manually assessed – so this could slow down future applications and rule out some providers.

Avoid the credit rejection spiral:

A good suggestion if you’re in need of credit is to go for lenders or comparison sites that offer a ‘soft search’ before you apply. A soft search is a type of credit check that allows lenders to access your credit report and see some key information about you without leaving a footprint or impacting your credit score. These types of checks are recorded not visible to other prospective lenders and it won’t have any effect on their lending decision.

Can we just opt out of credit scoring?

It may seem we have little control over how our information is collected, which can make us feel powerless when things are wrong. Unfortunately, you can’t really just opt out, even under new GDPR rules. Put simply if you don’t agree to a credit check, lenders are entitled to refuse your application and are likely to do so.

Do credit reference agencies wield all the power?

Credit reference agencies don’t tell a lender if it should offer you credit – that’s for the lender to decide. Yet if you’re rejected for a loan, credit reference agencies often get the blame, when there are a variety of other reasons you might get turned down. The Financial Ombudsman Service (FOS) receives around 1000 complaints a year about credit reference agencies. It says a growing issue is lenders not being clear on why customers get turned down and why they haven’t met the criteria.

So what have we learned?

Firstly, it’s important to check your credit report. Search online and you will have a range of options. Some offer free trials and then charge from the next month so bear that in mind.

Secondly check the report for errors and out of date information.

If you do spot an error, query it with the credit agency who will investigate on your behalf.

Thirdly take steps to improve your credit score. Such as keeping your credit utilisation low, paying bills on time, being on the electoral roll and using soft searches while you are shopping around for credit.

If you would like help improving your credit score this is a module in my Financial Liberation programme. Limited spaces are available for our upcoming online course. To find out more and join the waiting list click here.

If you found this post useful you may enjoy the Fearless Finance Podcast.

Click the button below

Go to Podcasts

Have You Downloaded Your Free Guide Yet?

Just add your name and email below and I'll send you my "7 Steps to Financial Freedom" guide

Learn How to Fix Your Money Mess

Change Your Mind About Money &

Create a Brighter Financial Future

We hate SPAM. We will never sell your information, for any reason.