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Your credit rating

“I am not a number, I am a free man” the nightmare cry of the Prisoner in the cult 60s TV series is a rallying call for anyone wanting a loan. Try to borrow money, sign up for new plastic or get a new mobile phone and your ability to obtain credit depends on how you measure up against the lender’s wish list for profitable customers, to make this decision they use a secret technique known as credit scoring.

This is a risk-based, number crunching attempt to predict your likely actions from the vast range of data they have about you. The actual scoring systems are never published and differ from lender to lender and product to product.

It’s an often mis-held belief both that everyone has a universal credit rating - a one off judgement on your creditworthiness – and that there’s such a thing as a blacklist. In fact lenders just plug in the facts about you, as they believe them, and clinically work out whether to bother lending you money or not.

The blacklist concept arrives because someone who is scored as a bad risk for one lender is likely to be scored a bad risk for most others and as harsh as it seems, no lender is obliged to dole out credit.

The industry accepts errors do occur, but when applications are aggregated into millions, the mistakes cancel each other out. This may seem unfair if you’re the one suffering – but these secretive methods aren’t there to protect you, but the lender’s bottom line.

As its profitability that counts, credit scores don’t just predict whether you’re a good or bad risk, but whether you’re likely to lose the financial institution money. Of course, if you are likely to default you are an immediately risk to profits.

This is confirmed by Barry Conroy, director of credit reference agency Equifax. Rejection letters may arrive at the door of even the most solvent; “lenders try to predict not only whether you’ll pay, but how you’ll pay. Its likely there are organisations who reject applicants simply because their history used to predict they will repay their debts every month and that isn’t profitable.”

Some lenders, like internet only bank Cahoot, will also use credit scoring to determine the specific interest rate you are charged.

What they know about you

There are three prime sources of information used to determine your score.

The application form: when applying for credit fill out the form carefully as this is the primary source, it’s where lenders obtain details of your salary, family size, reason for the loan and whether you’re a home owner.

Your relationship with the lender: lenders use their knowledge of existing customers to help in their assessment.

Credit reference agency files: two companies, Equifax and Experian, compile files on every UK individual, these are sent to your prospective lender. This information comes from:

a. Electoral roll information is publicly available and contains people’s address details and the details of who lives with who.
b. County Court Judgements (CCJs) and Bankruptcies are used to indicate if you have a history of debt problems.
c. Financial data from banks, building societies and others is compiled from all your payments and transactions, around 200 million records a month are tracked.

Improving your credit score

The huge variance in lender’s scoring systems makes hard or fast rules to improve your score difficult. However a definite first step is to ensure you are on the electoral roll, as this is the basis for all data.

The other key concept is always try to follow the original repayment plan for your financial products, even if you’re struggling don’t default, contact your lender. It should try and help as changing your repayment schedule is preferable to you not paying at all – and though it will hit your credit score, it’s better than a court judgement against you.

Potential over indebtedness can cause rejection, scoring looks not only at your repayment history but the likelihood you will repay in future. Lenders sometimes count multiple credit applications as evidence of this, so if you’re simply searching for the best price – ensure the lender is aware you just want a quote and you are not applying or it will end up on your file.

Evidence of stability also tends to help your credit score. Those who own their home rather than rent or are employed rather than self-employed tend to score more highly. Rumours even suggest putting a fixed line rather than a mobile on application forms can help your score.

If you are having difficulty gaining credit trying an institution you already have a relationship with is a good place to start. A lot of lending is made to existing customers as companies’ have more data on them and can therefore predict their behaviour better, diminishing the risk of lending. Lenders are more likely to loan money to their own customers simply because they can risk assess them better.

One very common cause of rejection is because you have a limited credit history – which means lenders cannot predict your behaviour. This is a ‘chicken and egg’ situation - you can’t get credit without a history, you can’t get a history without credit. If your bank won’t lend to you, there are a few lenders, such as Capital One, the Associates and even Barclaycard who have specialist ‘rate for the risk’ credit cards.

These charge very high interest, but apply then spend on the card ensuring you repay each month so there is no charge and after a year you will have built sufficient history to enable you to move to more normal products. This is also a good way to rebuild credit for those who have a poor history

And a final thought, though it may be tempting, lying on your application form won’t help, firstly it’s an offence, but also if lenders can’t corroborate your information it’s normally not used for credit scoring anyway.

Credit reference file errors

The Consumer Credit Act 1974 gives you the right to see your credit reference files you can obtain yours from either Equifax, Experian or the new agency CallCredit. You need to write or apply online to them including details of your six previous addresses and postcodes and enclosing a £2 cheque.

Even if your not applying for new products it’s worth checking your file for errors every 18 months or so.

Things to check include your present and past address details, this can lead to you being judged on someone else’s credit history. Also your finances may be incorrectly linked with family members or possibly even people you haven’t met.

If you disagree with anything on your file, write and request it’s changed, if the agency agrees with these or any other amendments they should quickly change your file. Though sometimes you will need to talk to the institution where the poor reference originates.

Unfortunately there are times the agencies disagree and are unwilling to amend, if this happens you are entitled to add your own comments to the file to explain your side, do this carefully and keep your entry concise and factual.

You may have seen adverts for credit repair agencies promising to improve your rating for a fee. However there’s nothing they can legally do that you can’t do yourself for free.

Avoid any agency offering to repair correct credit data. Some firms will advise you to perjure yourself and swear you didn’t receive a County Court Judgement even when you have. Once it’s illegally wiped they try to quickly negotiate a settlement with the lender, before its re-served.

What is perfectly legal though is negotiating with a company you owe money even after a CCJ has been served. If you offer them a settlement (not necessarily even the full amount) you can include as a condition of final settlement that the CCJ should be wiped. Citizens’ advice bureaux and free debt advice helplines should provide guidance on this.