What You Need to Know about Your Credit Rating
In some countries, checking your credit is as easy as logging onto a website, plugging in some personal information, and looking at a number that has been assigned to you. In the UK, though, things are a bit different. There’s no real universal system used to rank consumers, nor is there a credit “blacklist” – though many residents believe otherwise. Here’s what you need to know about your credit rating and how for example when looking for logbook loans in Bristol, lenders will make their decisions.
Who Has Your Credit File?
Because there’s no universal system used to rank your credit, you’ll need to pull your credit files on your own – and from three different companies. These are held by Experian, Equifax, and Callcredit, and per UK statutes, you can check them annually for just £2. In order to get this rate, though, you’ll need to go to each of these three companies directly rather than through third-party companies who may charge extra for credit monitoring or identity protection services.
Just a few years ago, you had to wait days or even weeks for your credit files to come in the mail. These days, though, once you’ve paid your £2, you can gain instant access to your files and check them right online. You can save these files to your hard drive or to removable media like a flash drive, or you can print them out and file them away for later reference.
What Are You Looking For?
Once you have your credit file from one of these companies in front of you, there are some things you’ll want to check. First and foremost, you should check your personal information for errors. Even the slightest error, such as the misspelling of your last name) could result in problems for you when you attempt to borrow money. Along those same lines, make sure you take the time to check addresses on old accounts to ensure they’re up-to-date, and if you’ve recently split up with someone, make sure you’ve been financially delinked.
A surprising number of credit files contain inaccurate information related to actual accounts, so take the time to go through each reported account carefully. You might find accounts that you’ve paid off being reported as delinquent, or you may even find accounts you closed a long time ago still listed as open. These things can have a negative impact on your credit, so make sure you contact those billers and take care of the issues right away.
Why Do Lenders Look at Credit Files, Anyway?
Imagine that someone comes to you and asks you to borrow £100. Chances are good that you’ll think about how well you know that person, how trustworthy they are, and how likely they are to pay you back as promised. Unfortunately, lenders don’t know everyone they lend to, so each and every time a bank issues a loan, it’s taking a significant risk. A credit file is used to determine a potential borrower’s future behaviour.
Although you might think that having poor credit is the worst possible scenario, the truth is that having little credit – or no credit at all – is just as bad. Lenders will look at the way you’ve handled credit in the past in order to assess their risk in lending to you right now.
If you haven’t handled credit well, or if you’ve never handled credit at all, you’re probably going to be considered a high-risk borrower.
Odd Reasons for Credit Denials
If you’re denied credit for one reason or another, but your credit rating isn’t bad, you might find yourself struggling to understand what happened. There are a few situations in which certain types of lenders may not extend credit to you. For example, if you have relatively decent credit and three credit cards that you pay off in full each month, you might be shocked if you’re turned down for a fourth card with an excellent introductory interest rate. In this case, it isn’t about the risk you present to the lender – it’s about the fact that you won’t make the lender any money.
Credit cards only make lenders money when people carry balances. If you pay off your credit card each month, the lender has no way to charge you interest. This means that the only money the lender makes is from things like cash advances or annual fees – things that come with flat fees rather than an APR. Along those same lines, a bank will value you as a consumer based on products you might buy in the future. For example, let’s say you apply for an interest-bearing savings account with a high yield. Your credit is good, but you already have a mortgage with another bank. If that bank is looking for profitable mortgage borrowers, it might turn you down for that savings account.
How Your Credit Affects Interest Rates
You’ve already learned how your credit file can stop you from qualifying for a loan or other credit product, but your credit can also affect the interest rates associated with credit products you do receive. Once again, it all goes back to risk. Assume for a moment that you have fair credit due to a couple of delinquent credit card payments a few months ago. Now, imagine going into the bank alongside someone with good credit, and both of you sit down to enquire about a £2,000 personal loan.
Chances are good that both of you will be approved for your loans, especially if you’ve gotten your credit card payments back on track since your prior delinquencies. However, because your credit is only fair, you have to pay a 7% interest rate. Meanwhile, the person with good credit only has to pay a 4% interest rate. Based on your credit file, the bank is assuming more risk in lending to you. Because of that, it charges you a higher interest rate so that it can earn more money from you in a shorter period, thus helping to recoup any potential losses.
The person with good credit presents less risk, so his or her interest rate is much lower.
Although much of your credit rating is shrouded in mystery and most lenders have their own unique sets of formulas that determine your personal risk, it’s still important to look at your credit files at least once per year. It’s also very helpful to understand the role your credit file plays in your financial future.