Credit Ratings
You’ve probably heard the words ‘credit score’ or ‘credit rating’ before, but you might not know what this actually means or what it might mean for you. A credit score or rating is a number between 300-999 that determines the customer’s ‘creditworthiness’. This basically means how ‘safe’ a lender may perceive you to be as a result of your previous financial history when applying for things like credit cards, loans, phone contracts and mortgages. The higher your credit score, the more likely you are to be accepted for whatever it is you’re applying for.
For example: if you were to take out a phone contract for the newest smartphone at £50 per month and failed to pay this contracted cost for the entirety of the contract, your credit score would then decrease because you haven’t ‘paid back’ what the contract (and phone company) have provided to you. Your credit score will be calculated on how well or badly you have managed previous debts, and how much money you have previously or currently borrowed.
What is credit for and why do I need it?
Credit scores operate as a way of checking your financial history, allowing businesses and banks to check how reliable and trustworthy you might be in paying back borrowed money. When you purchase something ‘on credit’, it means you pay it back over a period of time rather than in one lump sum. Credit also means receiving something in advance of paying for it. Credit for example is needed for utilities where the company allow you to use gas,electricity, water etc. without paying for it in advance. It is also needed for overdrafts, credit cards, loans and even just to have a debit card.
Credit can be very helpful in managing costs but is can also be almost essential in getting any kind of contract such as wi-fi, mobile phones and tenancies. Credit scores are also affected by direct debits that you may have set up, overdrafts and other repayments including your household bills, so maintaining a good credit score is vital.
You need a good credit score to purchase and use most services, as the businesses/companies offering these services will likely perform a ‘credit check’ on your credit history, which produces your credit score.
Credit Checking
Nobody has the right to credit. Before giving you credit, lenders such as banks, loan companies and shops want to be confident that you can repay the money they lend. To help them do this, they may look at the information held by companies called credit reference agencies.
A credit reference agency (CRA) is an independent organisation that securely holds data about you – including things like your credit applications, accounts, and financial behaviour. There are three main credit reference agencies in the UK, Experian, Equifax and TransUnion.
Equifax Ltd
Customer Service Centre
P.O. Box 10036
Leicester
LE3 4FS
0800 014 2955
Experian Ltd
Customer Support Centre
PO Box 9000
Nottingham
NG80 7WF
0800 013 8888
TransUnion
Consumer Services Team
PO Box 491
Leeds
LS3 1WZ
0330 024 7574
Bad Credit
Bad credit is not the end of the world (up to a point) and can be improved in numerous ways. Be aware though, if your credit rating is very low, you may find it very difficult to get credit. Gas and electicity companies may insist on you havng a pre-payment meter, or you may get turned down for a wi-fi or mobile phone contract.
What brings a credit score down?
Lots of things can bring your credit score down, including:
- Not being on the electoral role;
- Not paying bills, or paying late;
- Making lots of applications for credit;
- Being turned down for credit;
- High levels of existing debt;
- Only ever paying the minimum payment on credit cards;
- Living in your overdraft;
- Using a high percentage of your available credit limit(s).
- Identity theft where fraudsters have taken credit in your name and not repaid it.
Improving your Credit Rating
First of all, you should use a free online credit check site to check your credit score. Once you’ve found out your credit score, there are lots of ways you can improve it:
- Register on the electoral roll. If your name’s not on there, you’ll find it much harder to get credit. Go to the GOV.UK website to find out how register to vote online or by post.
- Check for mistakes on your file. Even having just a slightly wrong address can affect your score. So make sure you check all the details and report any incorrect information straight away.
- Pay your bills on time. Paying a phone landline or internet contract on time is a great way to prove to lenders that you can manage your finances. Importantly, late payments can negatively affect your credit rating
- Check if you’re linked to another person. Having a spouse, friend or family member’s credit rating linked to yours through a joint account could affect your personal rating if they have a poor score.
- Check for fraudulent activity. If something on your credit report is wrong or doesn’t apply to you, contact the credit reference agency to have your file updated. For example, if someone applied for credit in your name without your knowledge.
- High levels of existing debt. Ideally, you should pay off any outstanding debt before applying for new credit. This is because banks, building societies and credit card companies might be hesitant about lending you more if you already have a lot of debt.
- Try not to move home a lot. Lenders feel more comfortable if they see that you’ve lived at one address for a considerable period.
- Keep your credit utilisation low. Your credit utilisation is how much of your available credit limit you use. For example, if you have a credit limit of £2,000 and you’ve used £1,000 of that, your credit utilisation is 50%, so you’re using half of your credit limit. Usually, using less of your available credit will be seen positively by lenders, and will increase your credit score. If possible, try to keep your credit utilisation at 25% or lower (Money Advice Service).
No Credit History?
Your credit history is a record of how you use credit, such as when you’ve applied for it, whether you’ve paid it back, and how much you currently have access to. If you’ve recently turned 18, are new to the UK, or just haven’t held a credit account in the last six years, it’s likely you won’t have much of a credit history. If you have no credit history, there are numerous ways you can build it up.
- Credit builder cards. These are specifically designed for those with none or very little credit history. These cards will often have a lower spending limit and higher interest rate, however, if you are only using them to establish a credit history, then staying well within your limit and making full repayments each month should be achievable.
- Overdrafts. Using overdrafts and being able to pay them back is also a good way to build up your credit history, but be careful. Ensure that if you do use your overdraft, that you are able to pay it off before any fees or interest kick in.
- Take out a small form of credit. This might be a mobile phone contract or store card. They’re usually easier to get accepted for than credit cards, but can still demonstrate your ability to pay your bills on time and be financially responsible.
- Manage your household bills well. Looking after your utility accounts (e.g. water, gas and electricity) can help build your credit history and show companies you’re responsible. Even your rent payments can boost your score, provided you make them on time and in full – sign up to CreditLadder to arrange for information about your regular rent payments to be added to your credit history.
The key with building a credit history is to start small and work your way up - you can’t just expect it to happen overnight, as frustrating as this may seem. There are lots of online tools such as Experian and MoneySavingExpert who can tell you exactly what you need to do to improve or build your credit score.
County Court Judgments (CCJs)
Although they may seem frightening, receiving a county court judgment for debt doesn’t mean you’re being sent to prison or getting a criminal record. County Court Judgments, known as CCJs, is a legal judgment, issued by the court, stating that you are legally deemed to owe a set amount of money. You can allow someone to take you to court if you are disputing the amount you owe but be prepared to settle the Judgement (i.e.pay in full) within 30 days or it will stay on your credit file and make it extremely difficult for you to get credit for the following 6 years.
According to the Money Advice Service, before registering a CCJ the creditor must send you a warning letter or default notice, letting you know that you need to repay what you owe, otherwise legal action will start.
For credit agreements regulated under the Consumer Credit Act, you must be sent a default notice, at least 14 days before any action is taken. Once you have received the claim, you must reply within 14 days - do not ignore it. Seek advice from free debt advisers on how to proceed. You can pay a CCJ within 30 days and it will be removed.
The Money Advice Service provide an excellent resource to refer to if you find yourself in this situation, so try not to panic. You can find it here.
Debt Poverty
Debt poverty is only ever paying minimum payments and relying on credit to live. This will affect credit rating and banks do intermittent checks. If they find your credit is bad, they will reduce your overdraft and credit limits. This can be below the limit you are in debt for and your financial situation can become very nasty, very quickly. However, there are charities specifically designed to help those struggling with debt and to help you understand your position and how to get out of it as soon as possible.
These charities offer free, confidential support to those struggling with debt and debt poverty.
If you are concerned about debt, unpaid fees/loans or any other financial worries, you can contact Advice and Money at adviceandmoney@cardiff.ac.uk.
Contact Student Advice
Advice@cardiff.ac.uk
+44 (0)2920 781410