In this blog, we will cover fundamental information about credit rating, how to access your credit report, and how checking your records may impact your score.
1. What is Credit History?
In the UK, banks, lenders (companies that lend you money in one form or another) and other financial organisations provide your information to credit rating agencies (CRAs - more on them later). These agencies use that information to create a file illustrating your 'credit history' and assign you a credit rating, also known as a credit score.
Your credit history or record is a report of your financial activity. It shows whether you pay your bills on time, the amount of credit you have been entrusted with,how much of it you make use of and whether you have missed any payments or received a county court judgment for debt (CCJ). In other words, it reflects your financial habits and enables lenders to assess your ability to repay a debt.
Your credit rating is calculated using a points system based on the contents of your credit report. The higher your rating, the more reliable you appear to lenders. If you have never borrowed money before, it may be difficult for lenders to assess the risk of lending to you, and your credit score will reflect this.
2. What information is included in your credit report?
Your report typically includes the following information about you:
- Your full name, aliases, and any previous names
- Date of birth
- Current and previous addresses, along with electoral roll registration
- A summary of your accounts, such as mobile phone subscriptions or credit accounts, indicating opening/closing dates, current balances (if still open), and payment history
- Records of hard searches by lenders on your credit file in the past two years
- Individuals with whom you share financial ties, like a joint bank account or mortgage
- Any information related to CCJs, bankruptcy, outstanding alimony or child support, and debts referred to a collection agency (e.g., unpaid utility bills)
3. Why is credit history important?
Sooner or later, everyone using financial services in the UK will have a credit file. It is important to be aware of it and understand how your actions may impact your score. It can be easier to damage your score than to improve it, and the latter can take a considerable amount of time. There are various ways to improve your score, some quicker and easier than others, and we will delve into them in our upcoming blog. The higher your credit rating, the more services will be available to you and on better terms.
Banks and lenders assess your credit history to determine your responsibility as a borrower and decide how much and under what terms they're willing to lend you. A good credit score is particularly beneficial or even crucial in various situations, such as requesting an overdraft, purchasing a phone on a “pay monthly” plan, applying for car financing or a mortgage, getting a credit card or personal loan, and even when dealing with property rental agencies that may conduct a soft credit check before accepting you as a tenant. Additionally, in some industries, employers may perform a soft credit check after you've applied to work with them, although this varies among employers.
If your credit score is low, you're likely to face rejection or unfavourable terms, like a very high interest rate. On the flip side, a high credit score opens up more options, lower rates, and various promotional offers.
4. Who provides credit rating?
The credit rating is offered by Credit Reference Agencies (CRAs). In the UK, there are three major credit agencies widely used by lenders - Experian, TransUnion and Equifax, along with a relatively new one - Crediva.
Each credit agency uses its own method for calculating credit ratings, and the scores they assign may differ. Under the GDPR, each agency is obligated to provide you with a free copy of your report if you request a Statutory Credit Report directly from them. Additionally, numerous free services offer the same data in a more accessible and comprehensive format. We have listed four popular services below, each providing a free report. The main difference between them is that they utilise information from different agencies.
MSE Credit Club - uses information provided by Experian.
Credit Karma - uses information provided by Equifax and TransUnion.
Moneysupermarket - uses information provided by TransUnion.
Clearscore - uses information provided by Equifax
Another service worth noting is CheckMyFile - the most comprehensive report that displays data from all four agencies. This service is not free, but they offer a free trial. If you choose to make use of the trial, remember to cancel it before it runs out to avoid getting charged.
5. What is a Credit Search and how can it affect my score?
A credit search (also known as credit check or enquiry) happens when your credit file is accessed by either yourself or a third party. There are two types of searches, namely hard and soft. It's crucial to recognise that some of these searches can hurt your credit score.
- A soft search occurs when you review your own credit report or when a company offers to check your eligibility for certain products or interest rates before you submit an application, commonly referred to as "pre-approval." This applies when a company only needs a basic overview of your financial history to pre-approve offers or show what you can potentially qualify for. Unlike a hard search, a soft credit search doesn't leave visible marks on your credit file but is recorded for your reference. Other lenders cannot see it, and it has no impact on your credit score. However, you can track who has checked your credit history.
- A hard search occurs when a company checks your full credit report, usually to assess your risk and decide whether to accept your application for their product, such as a store card or a pay-monthly smartphone purchase. The record of a hard search, regardless of approval, affects your overall rating and will be displayed on your report, visible to all creditors. Having more than two hard searches in the last six months is undesirable, indicating excessive reliance on credit and marking you as a high-risk borrower. It's advisable to begin by checking your eligibility through a soft search and only submitting an application if you see a strong likelihood of acceptance. If approved, it’s a good idea to be cautious not to apply for additional credit too soon. In case of a refusal, avoid reapplying, as each consecutive hard search will further damage your credit score.
Follow our Pockit blog to keep learning about your credit history and some simple ways that can help you build your credit score. Keep an eye out for further tips and advice on better ways to manage your money and improve your financial life. This post was created using informational resources provided by OPORA, a charity supporting Ukrainian refugees in the UK. Learn more about OPORA by visiting https://opora.uk/