The secrets of your credit rating
Don't let your credit report turn into a horror story - follow our tips and keep it looking squeaky clean!
If you're a regular lovemoney.com user, you're doubtless a pretty savvy consumer who wants to track down the cheapest deals on your financial essentials - but what you might not know is that if you want the cheapest credit cards or loans the odds are stacked against you.
The reason is because shopping around for cards and loans could well see your credit rating downgraded - leaving you offered expensively-priced credit.
And if you try and take action and apply elsewhere for a cheaper deal, you may do further damage to your credit rating and kiss your chances of an affordable deal goodbye.
It's an unhappy situation and one Parliament is investigating. This week the Commons Treasury Select Committee is investigating the impact on credit ratings of consumers shopping around to obtain credit on the best terms.
Its probe will focus on two aspects of the UK credit market: the extent to which multiple applications hurt your credit rating: and the extent to which lenders should offer "best practice quotation searches" (i.e. indicative quotes on what consumers will be charged before they apply).
The process promises to shine a light on the often murky world of credit scoring. Here's what you need to know to help boost your chances of getting the cheapest deals.
Beware 'typical rates'
In most cases, an enquiry for a loan or credit card results in a full credit search.
This is because these products use 'risk-based pricing' - meaning that the rate you see advertised isn't necessarily the one you'll be offered. Instead, the rate actually charged is based on your credit status - which means that you won't know how much you'll pay until you undertake a full application.
To help guide consumers, the Consumer Credit Act states that financial products must come advertised with so-called 'typical rates' - more than 80% of loans advertise typical rates, and one-third of credit cards.
These are supposedly indicative, showing the rate of interest most consumers will pay.
The guidelines state that two-thirds of all applicants should be offered the typical rate - but in practice studies have shown that the vast majority of applicants are offered far higher rates.
The current system doesn't work!
Government watchdog the Office of Fair Trading hasn't so far forced banks to act according to the guidelines.
Worse still, under the current system, you'll only know how much you'll pay after making a full application - and that application will be marked on your credit report.
Apply for four or five alternative deals at the same time and you could soon be marked down as a 'poor credit risk' and unable to secure cheap credit - or any credit at all.
To remedy this situation, consumer groups are calling for banks not to undertake full searches when assessing how credit-worthy applications are. Instead they want typical rates to be more strictly enforced and for banks to offer more 'quotation' rates before consumers apply.
Yet credit reference agencies have argued in favour of the existing risk-based model: MyCallCredit told the Commons committee that searches based on quotation rates offer no guarantee to the consumer that they will be accepted nor provide any credible risk assessment to lenders.
What's more, they argue that extending quotation searches would make it more expensive for banks to lend - pushing up the price of credit for everyone. Worse still for consumers, the Information Commissioners Office has, as part of the committe's probe, upheld the principle that multiple credit searches can adversely affect an individual's credit score as "justifable".
Boost your chances of cheaper credit!
You may currently never know what rate you'll be offered for a credit card or loan until you apply but there are steps you can take to make sure you secure the cheapest deal.
Your first step is to obtain a copy of your credit report, which is suprisingly easy. The three main agencies - Experian, Equifax and CallCredit - all offer free trial services that allow you to see what's on your report.
If you've been turned down for credit, find out why.
The industry's Guide to Credit Scoring requires that lenders give reasons why a consumer has been turned down and whether information from a credit bureau contributed to that decision. And if there's something on your report you think is wrong, contest it.
Under the Data Protection Act, consumers have the right to dispute the data held on their file. Lenders have 28 days to confirm or remove data that is the subject of a dispute.
An accurate, healthy credit report will help secure your chance of getting a cheap deal - and so will the timing of your applications. In a written submission to the committee, Experian states that "we... generally expect more than five credit application within a three-month period to have a negative effect". On its own, this wouldn't see you turned down for credit, but it won't help either. So to be safe, compare no more than five deals in a three-month period.
Finally, it's important to prepare your finances in advance. Pay down debts where you can and stay in the black: for credit cards and store cards, some banks may provide extra information about how you manage your current account.
Know the law on old debts too: if you've missed repayments in the past, it stays on your credit report for 36 months. With a County Court Judgement (CCJ), the evidence is there for six years.
Lenders see these and mark you down, because they fear you may not honour your obligations - so don't give them an excuse.
More: The best way to get out of debt | You've got a debt problem
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Taken me a while to get to this discussion. Does anyone know why the CRA records of multiple applications can't simply inculde the outcome of the search? A comment 'approved by provider, declined by applicant' would not affect credit score, whereas 'declined by supplier' should. I would also assume that consumer searches, such as for insurance quotes will only be recorded if you ask to pay by installments? Easily avoided during the initial search. Also, does anyone out there know why old records are simply recorded as 'Inactive' (or similar) rather than removed completely when the account is fully closed?
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Our Barclaycard statement said [i]"as your card expires on 31/10 and a new card will be issued a week before"[/i] but instead of the new card we received a letter refusing it after well over 30 years paying off the full amount every month and only missing dates long ago, once with the mail, once when their online system was down, and once when I just plain forgot - so much for loyalty ! [b] [/b] [b]"If you've been turned down for credit, find out why. The industry's Guide to Credit Scoring requires that lenders give reasons why a consumer has been turned down and whether information from a credit bureau contributed to that decision" - WRONG ! [/b] Several calls to Delhi (?) were unproductive but all insisted we should get a credit report (why should WE get one - let THEM get it!) and eventually someone at Northampton grudgingly admitted [i]"it sounds as if we may have the wrong information"[/i] so as instructed we wrote to the Customer Service Director with a copy of our Experian report. Yesterday we duly received a "cloned" letter saying (inter alia) [i]"our aim is to provide a first class service and I regret you had cause to complain[/i] [i][about our decision to close your account][/i] (eh, pardon?) and explaining that the decision [i]"was based upon the history of your account and information we receive from Experian about accounts you maintain outside the Barclaycard Group"[/i] but we only have NatWest current accounts and NS&I Savings neither of which were listed on our Experian report.[i][/i] [i] [/i] Also that it is based on [i]"possible or potential risk to the business"[/i] which [i]"can also affect customers who have a large number of credit accounts[/i] (no, just this one) [i]with high balances[/i] (no, average £1,000 paid in full every month) [i]or a high amount of unused available credit[/i] (yes, because years ago they increased it without our asking or needing it) and that [i]"on checking your credit file it would appear that you have very few credit agreements[/i] (none apart from this one - no loans, no mortgage) [i]yet above average credit searches"[/i] - what constitutes average ? [b]Experian states that "we ... generally expect more than five credit application within a three-month period to have a negative effect". On its own, this wouldn't see you turned down for credit, but it won't help either.[/b] Actually there were 9 - one from a mail order company for an account we didn't ask for, the rest for recent online comparison site car insurance renewal quotations, 2 from RBS re Churchill and Direct Line quotes and the other 6 from Royal & Sun Alliance (unspecified) and one of those too has been referred to the Financial Ombudsman Service, but that's another story ! Moral ? Competitive online insurance quotes can damage your credit rating !! [i] [/i] We duly contacted the FOS and were informed that issuers have every right to refuse and ARE NOT OBLIGED TO GIVE A REASON but the refusal should not appear on our credit report and can be referred to the FOS if it does !! Is this a portent of Barclaycard going the way of closing non-interest-profitable accounts ? If so it seems counter-productive to ditch the commission revenue from purchases into the bargain, but it would be nice of them to just simply own up and give us an honest answer like "sorry, but we don't make enough from your account to cover the administration costs so it's not worth our while." Frankly, my dears we don't give a damn, because when we told the story to our local NatWest branch (only as an aside to a different query by telephone, DIRECT) with whom we have banked for over 45 years they were horrified and immediately offered us a credit card, so like they say there really is "Another Way" !
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I check my credit report every 6-9 months and had reason to check again last week as we are looking at moving. We have a portable mortgage and discovered that although our existing mortgage can be moved, we have to have new credit checks (even though the current deal has 3 years left to run.) I asked whether they require a credit check if we stay put (they don't!) If it comes back unacceptable (possible but highly unlikely as we have 80% equity and my husband has worked for the same company for 11 years) then we'd either have to abandon the move or pay redemption fees and move provider. So portable mortgages aren't as clearcut portable as they make out! Anyway I checked and all is great except one check done on me by my bank a couple of months ago when I was evaluating whether to clear my overdraft (authorised as the cheapest way of financing a business start-up last year) and take out a loan. I had no idea, nor was it mentioned anywhere, that I would be credit checked just for making an online enquiry. As it happened it was far cheaper to stick with the overdraft and pay it off over the next couple of years than it was to take out a loan for the same period! And if we move, we'll pay it off anyway so that will be the end of that. But they should tell you in big bold letters that a check will be made so that those with heavy borrowing can evaluate whether they're even going to enquire. And if you are on a contract for a mobile phone, I discoverd that every time you move supplier/provider it's on your credit record too and listed as being checked! Interestingly, our business account (for a partnership business not a Ltd co) didn't feature at all on the credit checks! You do wonder if the system is doing everything it can to prevent people from shopping around to find the best deal to force them to stay where they are.
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09 December 2009