How to understand your Credit Report
Credit Ratings, Credit Scores and Credit History are all designed to show lender's a borrower's likelihood of repaying a debt.
Lenders will use information supplied by a credit bureaux to help them decide whether they will accept your mortgage application. They use information shown on either Equifax or Experian to decide whether it matches their criteria.
What is the difference between a credit score, a credit rating and a credit history?
What is a credit score?
Experian will give you a credit score between 0-999, with 999 being the best possible score. Equifax will give you an overall rating of either Very Poor, Poor, Fair, Good or Excellent. The score or rating is calculated using your Credit Report, based on how you manage your finances and how much credit history you have over the past 6 years.
So, how does this affect me?
Each bank and financial institution uses your credit report information to calculate their own score and rating for those that apply for loans or mortgage products. This information is confidential to the individual bank and it is not somethings we, or you, can know. However, the higher your score and better your history the more likely you are to be accepted for a financial product. Before you apply for a mortgage for example, it makes sense to review your credit report.
Credit account information shows details of your credit agreements with lenders. The most important history is unsecured in the last 12 months and secured in the last 2 years, however, some lenders will look further back than this at the full six year history.
Equifax and Experian represent defaults in a different way:
Shows the dates that you have been registered on the electoral roll and the addresses you were recorded at. Incomplete address history and the length of time shown on the electoral roll can affect your credit rating.
This shows any County Court Judgments (CCJs), Bankruptcy, Debt Recovery Orders (DROs) or Individual Voluntary Arrangements (IVAs). Any of these items can restrict both the choice of lender and products available.
What decreases my Credit Score?
Payments: Late payments (including Defaulted and Delinquent accounts) can decrease your score for up to 6 years, so make all payments on time and in full.
Credit Accounts: Opening new accounts (except mortgages) decreases your credit score, so hold off doing so unless absolutely necessary.
Closing existing accounts can decrease your score, so keep accounts open (unless you are settling an account).
Credit Limits: Going over your agreed credit limits (e.g. spending £1100 on a credit card with a £1000 limit) will decrease your credit score.
Total Credit Balance: If the total amount you owe across all credit accounts (excluding mortgages) is above £15,000 your credit score will decrease.
Availability Credit: Availability credit is your total credit limit minus what you have spent on credit accounts such as credit cards and overdraft facilities. So, the higher your credit limit or the less of your credit card you use, the more available credit you have, and this is good for your Credit Score.
Public Records: If you've declared yourself bankrupt or insolvent, agreed an Individual Voluntary Arrangement (IVA) with a bank or financial institution, or had a Country Court Judgement (CCJ) recorded against, these will decrease your credit score for up to 6 years.
Do you understand your credit rating? Mark Edwards explains some simple things that you can do to improve your credit score.