Credit ratings are one of life's little mysteries. One credit agency has revealed a model of how they score their customers and, more importantly, how you can improve your credit rating.
At the tender age of 18, excited by the prospect of being old enough to be ‘credit worthy', I decided to apply for a credit card.
I was rejected.
Mortified by my credit malignancy, I hurriedly sent a cheque off for £2 to a credit reference agency as I tried to find out why I couldn't get a card.
So, imagine my confusion when, after zealously ripping open the letter, all I could find were three empty pages, listing only a record of my mum's Grattan catalogue purchases and a dormant account registered to the wrong postcode.
When I went back to my bank to ask why I was refused, I received a curt explanation which basically said it was probably because ‘I didn't have enough credit'.
Well, if I can't get credit in the first place, how do you ever expect me to have enough?
The Mysterious Catch 22
Thankfully, at the wise old age of, er, 23, I have done my fair share of borrowing and established a credit line for several years now.
But the truth is, with many lenders tightening their belts, getting credit is becoming tougher - and finding explanations as to why you're rejected may be even harder to find.
So what exactly do lenders want?
Working Out The Credit Formula
Credit reports and credit ratings are one of the most complex things in finance to understand, and deducing what exactly affects your personal credit rating can be harder to solve than an Agatha Christie mystery.
Credit agency, Equifax found that while some consumers recognise the impact of poor financial management on their credit score, many don't appear to know how their financial behaviour affects their rating.
The reality is that credit reference agencies are looking in more detail at consumers' credit information for signs of possible stress. Equifax states that carrying a balance of more than 30% of your credit limit may signal to potential lenders that you are struggling.
Lifting The Credit Veil
So, in an effort to ‘lift the veil' on the mystery of credit reports, Equifax have revealed their own 'Credit Scoring Test' system, enabling you to test the water as to whether you would be a good candidate for credit:
|
Questions |
Yes |
No |
|---|---|---|
|
Are you registered to vote at your present address? |
10 |
0 |
|
Do you have at least two active credit accounts? (such as a credit card or loan) |
10 |
0 |
|
Are all your credit account payments up to date? |
15 |
0 |
|
Have you missed payments on your accounts in the last two years? |
0 |
10 |
|
Do you have any County Court Judgements or have you been declared bankrupt? |
0 |
25 |
|
Have you ever defaulted on a credit agreement? |
0 |
25 |
|
Have you applied for more than two items of credit in the last six months |
0 |
5 |
And, this is how you'd add up:
|
Excellent - Your score shows that you would be a strong candidate for credit. |
90 - 100 |
|
Good - You have a good chance of being granted credit |
70 - 89 |
|
Fair - Your may have some problems obtaining credit. |
50 - 69 |
|
Poor - You may have considerable difficulties in obtaining credit |
0 - 49 |
As you've probably deduced, the information in these tables is not exactly rocket science. You don't have to be Einstein to realise that if you have a County Court Judgement against your name, you may find it difficult to obtain credit.
However, there are some measures you can take which will stand you in good stead when applying for credit:
- Firstly, if you are not registered on the electoral roll, get on it. The electoral roll is used by companies to check that you are who you say you are. Often, if you are not on it you could be rejected for credit by default.
- Secondly, if you don't have any credit relationships, you may want to consider applying for some. Lenders are looking for signs that you are capable of repaying money you have borrowed. Building up a credit relationship with a company is worthwhile, even if you do pay off your balance in full each month.
- If you're rejected by one company, don't be tempted to apply for more credit before finding out what your credit report says. This is because every search by a lender leaves a 'footprint' on your credit file. Apply too many times, and your credit report could end up looking a tad muddy, as lenders may perceive lots of searches as an indication that you're overstretching yourself financially.
- If you have any accounts which you don't need, close them. Financial companies are paying more attention to the total amount of credit available to an individual and while you may not be using them, dormant accounts could be affecting your credit score.
- In addition, if you have a joint account, mortgage or credit account, bear in mind that if the other person has had credit problems in the past, it could hinder your own chances of getting credit. This is because you have a ‘financial association' with any party on a joint account.
- If you are no longer connected with this person, be sure to tell the credit reference agencies so you can be listed as 'financially independent'. That way, any financial misdemeanours by them won't tarnish your own credit rating.
- If you feel that your credit report doesn't accurately represent your overall financial situation, you could always add a Notice of Correction. A Notice of Correction is a 200 word statement you can add to your credit file to explain any entry on it. For example, if you missed a few payments on your credit card due to a bereavement or serious illness, ordinarily this would only be reflected as cold, hard data on a 2D sheet of paper. So an explanation may influence a lender's decision to give you credit.
However, although lenders are obliged to read the statement, ultimately, the decision is still at their discretion, and you could still be refused credit.
Remember, different lenders have different criteria when lending to a customer, so while you may be rejected by one company, another may embrace you with open arms.
However, although we may not be able to work out an exact formula for the ideal candidate for credit, following these measures will stand you in good stead when you next decide to sign on the dotted credit line.
More: How Your Bank Secretly Scores You / Why Can't I Get A Credit Card?