Credit Files & Scores
How confusing are Credit Files and Credit Scores?
I can understand when you look at a copy of your report when applying for a mortgage, it is like being asked to study the Dark Arts in Harry Potter or take the London taxi driver test The Knowledge!
This page of my website will hopefully shed some light on what mortgage lenders in particular look for when they carry out a credit search when you apply for a mortgage. Every lender will carry out a search but not every lender Credit Scores your application so this is something a mortgage broker should be aware of when looking to find you a mortgage (I am).
Lets start with some basics and dispel some myths
There are only 3 credit reference agencies in the UK that mortgage lenders use – Experian, Equifax and Call Credit. Any others are of no use to you if you are applying for a mortgage as lenders do not use them.
So which one should I look at?
Well that depends on the mortgage lender you are applying too for a mortgage. I know which lenders use which agency so once I have looked at the credit report I recommend below, I will have a good idea which lender to approach for your mortgage so will suggest looking specifically at one of the three agencies mentioned above.
As I said above, not all lenders credit score so if it looks like you could get a low score from me reading your credit file, it might be worth looking at a different lender? And how does credit scoring work – now that is magic! Each lender will apportion a score to every aspect of your application – how long you have lived at your address, are you an owner with a mortgage or renting, how long you have been in your job, employed or self-employed, amount of deposit, your age, how many kids you have, what debts you have and if you have any adverse credit – everything you enter onto a mortgage application will be allocated a score and if you do not get enough points, you fail. And each lender will allocate different points to different aspects of your application depending on their lending experience that has been built up over many years. I suppose a bit like artificial intelligence in that it can work out that if you are this type of applicant, you are more or less likely to default on a mortgage so the computer says yes or no to lend.
And a Myth dispelled
‘If I keep looking at my Credit File my score will go down’ or ‘it will leave too many ‘footprints’ on my file and lenders will refuse me a mortgage’. That is right up there with if I shave the hairs on my legs they will grow back thicker and stronger or oysters should be swallowed not chewed.
You can look at your credit file as many times as you like it with not affect your score or leave a footprint. You could look at it 1,000 times a day and it would not matter.
Soft or hard?
If a lender looks at your Credit File and leaves a ‘soft’ footprint it cannot be seen by subsequent lenders but if it leaves a ‘hard’ footprint it can so be careful of applying to a lender if they leave a hard print. Leaving lots of hard prints on your file in say a month looks like something is wrong because you were unsuccessful with the previous one, two, three or more mortgage applications.
Which Credit Agency do I recommend?
Check My File and here is the link
CMF provide data from three credit reference agencies – Equifax, Experian & Call Credit – so it is a good place to start to get an overview of your credit history. It maybe that once I have identified a lender, we get copies of your credit file directly from the agency the lender uses to make absolutely sure your credit history is OK for that particular lender.
How to Increase your credit score
Each lender scores you differently, so this is more art than science, especially because lenders are tight-lipped about what they’re looking for. Yet there are practical things you can do that should help both reduce credit scoring and fraud scoring rejection.
Trying to Increase your credit score is a bit like dating
As each lender has its own bespoke criteria, think of it like a beauty parade. You need to make yourself as attractive as possible to lenders, in the hope they’ll pick you out of the line-up so the tips below are to make sure that lenders see you in the best possible light.
Check your files monthly or before any major application
Your credit reference files, held at Equifax, Experian and Callcredit, contain enormous amounts of data on you. Errors happen and can kill applications, so it’s important to check your files regularly and to go through them line by line to check nothing’s wrong.
If possible check files at all three agencies (or at least the big two, Experian and Equifax) as different lenders use different agencies – and don’t assume the info will be identical on each.
Register to vote or you’re unlikely to get any credit
It helps if you are on the electoral roll so sign up immediately. Don’t wait for the annual reminder. Simply follow the instructions online where it will ask you a series of questions aimed at identifying you and the local electoral borough you need to register with. Note that you’ll need your National Insurance number to hand. Many worry some councils sell on the data but you can opt out of the electoral register which can be used for marketing. Credit reference agencies are allowed to use the full register which you can’t opt out of and that you should by law be on. The electoral roll can be a factor in scoring but even where it isn’t, not being on it can lead to delays as lenders also use it to help check your address and ID.
Not eligible to vote in the UK? Add proof of residency
If you aren’t eligible to vote in the UK so can’t be on the electoral roll send all three credit reference agencies proof of residency (utility bills, a UK driving licence, etc.) and ask them to add a note to verify this. This should help you get credit.
Never miss or be late on any credit repayments – it can have a disproportionate hit
Sounds obvious? Well it is. Even if you’re struggling try not to default or miss payments as it can have a disproportionate effect on your credit rating. Doing this once or twice could cause problems that can cost you for years. The easy solution is to pay everything by direct debit and then you’ll never miss or be late. While I caution against only making minimum repayments on debts (as the faster you repay the less the total interest) one technique is to set up a direct debit to repay the minimum purely as a vehicle to ensure you’re never late. Then manually pay more each month on top.
Don’t let your partner or flatmate’s credit score wreck yours!
It’s not usually whether you kiss, hold hands, live together or even are married that links your finances, and it’s simply whether you have a joint financial product. If you are financially linked to someone on any product, that means their files can be accessed and looked at as part of assessing whether to accept you. Even just a joint bills account with flatmates can mean you are co-scored.
Therefore if your partner/flatmate has a poor history keep your finances rigidly separate and it should maintain access to good credit for you. There are currently only four products that can infer financial linking – a joint mortgage, a joint loan, a joint bank account (not savings as they don’t go on credit files), and in certain circumstances your energy bills. Being jointly named on a utility bill with a flatmate shouldn’t mean you are financially linked – this should only happen when the energy firm is confident you’re a couple (e.g., when your bills are addressed “Mr and Mrs”). It’s worth noting that while many people think they have a “joint” credit card, these technically don’t exist. It’s one person’s account, the other just has a second card to access it.
If you’ve split up from someone, ensure you financially delink too
If you split up with someone you’ve had joint finances with (or just moved out from your flat share), once your finances are no longer linked, write to the credit reference agencies and ask for a notice of disassociation. This will stop their credit history affecting yours in the future.
Minimise credit applications by using the affordability calculators
The only way to know if you’ll get accepted for a product is to apply. Yet that could leave a footprint on your credit file and too many of those especially in a short space of time can hurt future applications. This is a catch-22 because if you get rejected or the rate you’re offered is high, you’ll want to apply elsewhere. These do not carry out a credit search so you can use these to obtain a rough estimate of how much a lender would let you borrow.
Check addresses on old accounts
This may sound bizarre but a wrong address can have a disproportionate impact. If you had for example an old mobile phone contract or credit card that you don’t use any more, but is technically still listed as active on your credit reference files, then check the address is your current one.
If the account is still listed as open, and it lists you as being at a different address, this can stymie applications due to ID checks. Check your file and go through every active account’s address to ensure it’s up to date. We’ve known people being rejected for mortgages because of this. Worse still they didn’t know the exact reason why as that’s a nightmare to find out.
Don’t ‘spend’ your applications too often
Every time you apply for a credit product (mortgage, credit card, contract mobile phone, car insurance paid annually etc.) it could add a footprint to your credit file. Too many especially in a short space of time, can trigger rejections as it makes it look like you’re desperate for credit. Therefore, space out applications if you can and don’t do them frivolously. In fact it’s almost worth thinking about applications as ‘spending’. Is it really worth spending an application on what you’re doing or could you save it for something else? So if you fancy a cashback credit card and have no other credit you need to apply for in the next six months or so, great, spend your application. But if you’re just about to apply for a mortgage, wait until after you’ve done that. Prioritising is important. For the same reason, if you apply for a cheap credit card and don’t get the credit limit you need, don’t automatically apply for another one.
Always check your credit files after rejection
If you’re rejected, check your files are correct immediately and do not apply again until you have checked your file. Otherwise you may mess up your score for some time as more applications mean more searches compounding the problem if you are rejected again. The lender will tell you which credit reference agency they used to assess your info so look at that one first.
Use a credit rebuilding card to build a history & restore past issues
Credit scoring is all about trying to predict your future behaviour based on your past history. Those with a poor history do poorly; but so do those with little credit history as then predicting is tough.
You need to build a decent recent history to show that you can be responsible with credit and use it well. The catch-22 is that as you have a poor credit history, getting credit is difficult. This is a card with a hideous rate, say 35% APR, which accepts people with a poor credit history. Yet provided you repay the card IN FULL each month, preferably by direct debit, and never withdraw cash, then you won’t be charged interest, so it’s no problem (don’t do this if you’re planning to do either of those).
Then just spend say, £50 a month on the card, and provided you have no other issues after six months or so, things should start to improve. After a year, it should make quite a difference.
Obviously, if you already have a credit card you aren’t using, then you can do the same on that without the need to apply for a new one.
Time it right – when you apply can have a big impact
Problems such as county court judgements and bankruptcy stay on your file for six years and data about applications for one year. So if you’re near a time when old issues will lapse, holding off applying for a mortgage can help.
Don’t withdraw cash on credit cards
This is both expensive to do as interest rates are higher and you’re charged it even if you repay in full each month. Crucially, many lenders see it as evidence of poor money management skills.
Payday loans can kill mortgage applications
Some payday lenders disingenuously suggest that taking them out and repaying on time can boost your credit score as it starts to build a history of better repayment. This is true to a very minor extent for those with abysmal credit histories. If you’re getting a mortgage you’ll need a far better than abysmal credit score. So you should avoid payday loans like the plague. Not just because they’re hideously expensive but because some mortgage underwriters (the ones who decide if you’ll get a mortgage) have openly said they simply reject anyone who has had a payday loan, as it’s an example of poor money management.
You can ask why you were rejected
If you apply for credit and are rejected lenders are supposed to give you an explanation if you ask for one but if they say “because you failed to meet our credit scoring requirements” unless you can improve your score, there is nothing you can do.
Never pay for a credit repair company
If you see these advertised, avoid them. Either they’re doing nothing you can’t do yourself with ease, or they’re using illegal methods that will bite you on the bum.
Stability counts, use consistent details between applications, don’t over churn
Homeowners rather than renters, and those who are employed, rather than self-employed, tend to be more readily accepted for credit. Putting a fixed land line rather than a mobile number on application forms can help with security checks and improve your chances. Being with the same employer, bank and current address for a while all help too. Keep personal details the same between applications. It’s crucial to be consistent, even over long periods when you fill in application forms. If you have a number of job titles or phone numbers, try to use the same one on every form. If you use different ones, you might be flagged up. Lenders can’t reject you just for this, but they should tell you if National Hunter has been a contributing reason why they declined you for credit.
Life change coming? Apply before that happens
You also score higher on lenders’ wish lists when you’re earning, so if you may be going on maternity leave, taking time off, or if you suspect potential redundancy, apply beforehand – though never lie about your details.
Cancel unused credit and store cards
Access to too much available credit even if it isn’t used can be a problem. If you have a range of unused credit cards and lots of available credit, it could be a good idea to cancel some of them. This lowers your available credit and should help. However, just to complicate things, long-standing bank accounts with good credit histories can be a benefit to your credit score, so they’re often best left open. There’s no definitive answer as to whether you should close down your old cards, because all lenders are different. But look to strike a happy medium – if you’ve lots and lots of unused credit, close some cards down, but don’t close ’em all. And above all, don’t max out. If you need to cut credit card debt costs, first check if the old cards will let you shift debt from other cards to them cheaply, as you then won’t need to apply for new credit. This helps your credit file and means you’re using your existing credit more efficiently.
Reduce your debts with savings, if you have them
The amount of outstanding debt you have is part of the information lenders have access to. If you’ve too much debt then that hurts your file. After all, would you want to lend to someone who already had a lot of debts to pay elsewhere? So minimising this is a clever strategy. In general you’ll be better off using savings to pay off expensive debts anyway. This is particularly true if you’re applying for a mortgage – the less you’re borrowing in proportion to your house’s value, the better deal you can get.
Default on your file – mitigate the damage
One of the major reasons I find that people cannot get a mortgage from a High Street lender is because of defaults. If the default shouldn’t be there, contact the company who registered it and talk to them to get it removed. If it’s genuine and fair your options are limited. After all, credit reference files are there to show lenders your history. Here’s what to do;
Negotiate with the lender. If you’re prepared to settle the debt in part or in full, then you can negotiate with whoever you owe the money to. You can also ask to make it a condition of settlement that the default is wiped off your credit file.
Let time heal it. The other route is to allow time to heal it. Defaults stay on your file for six years but even before that, the longer ago the default was, the less impact it has especially if your more recent credit behaviour has been impeccable.
Unfair default or other error on your file, you need to fight it
If you discover an unfair default on your credit file then you need to dispute it as it will block most applications. Check whether the same default is reported with the other two credit reference agencies as well. Unfair defaults can occur for a number of reasons. It could be a simple clerical error by the credit reference agency, in which case contact the agency to get it removed – they are usually helpful. More likely though is the lender has put it there in error or that you were in dispute with the company over whether you owed it the money or not. Try the following tactics:
Complain to the lender that put it on your file
Write to the company which put the default on your file to ask for it to be removed, telling it your reasons why the default is unfair. Keep this formal, polite and to the point. And tell it you’ll be taking it to the Financial Ombudsman if the default isn’t removed.
Add a notice of correction to your credit file(s)
If that fails, add a notice of correction to the file explaining the problem, e.g., “it was a joint account and the debt was run up once I had split from my ex-husband/wife,” or “the debt was for a pair of shoes from a catalogue company that never arrived so I refused to pay it”. Don’t go on too much when explaining the error. Be concise and factual. The notice will slow applications down, as most companies will look at it manually. But as a substantial default is likely to stop you getting credit, that’s usually not a problem.
Complain to the Financial Ombudsman
If the company has turned down your complaint, then you can take it to the Financial Ombudsman. The Ombudsman can adjudicate that the default is unfair and ask for all traces of it to be removed (and order recompense for damage if appropriate). If your complaint is with an energy company – perhaps its saying you owe it money when you don’t, leaving a mark on your file – then you can also take it to the Energy Ombudsman.
Paying for insurance monthly will affect your credit score
If you decide to pay for insurance in monthly instalments, a ‘hard search’ will be carried out and this will affect your credit score. It’s always worth paying upfront if you can – some insurance providers charge APRs of up to 40% if you pay monthly. However, many people also worry that using comparison sites will also affect their credit score. Comparison sites share your information with a number of insurers. They look at your credit file to check who you are, provide you with quotes and to see if you would be able to meet monthly payments.
Yet the good news is that these searches are ‘soft’ searches, so other lenders don’t see them and they won’t affect your credit rating, only you can see the search has been done.
Ask for a ‘quotation search’ or ‘soft search’ if available
If you’re just trying to get a specific quote for a loan, ask the lender to do a ‘quotation search’ or a ‘soft search’, not a ‘credit search’. This means that while an enquiry will appear on your file, only you can see it. Lenders can’t, so it won’t have an impact on your credit score. Sadly, many lenders haven’t yet adopted this practice, but it’s worth asking. If not, consider whether you really want to get a quote – if it’s unlikely you’ll get the product, then why bother?
For more information on how to boost your credit rating, please call me on: 01494 526400 or complete my online enquiry form.