When it comes to finances, numbers are key: whether it’s what you earn, your credit card balance or the interest rate on your mortgage, small changes can add up to a big difference.
Yet there’s one number you shouldn’t pay too much attention to – your credit score.
In the UK, there is no single, all-encompassing number attached to your identity that dictates to a lender – be it a bank, credit card firm, mobile phone company or anyone else – whether it should take you on as a customer.
What you do have is a credit file, that you have a legal right to see. It contains key public and private information about you, such as whether you’re on the electoral roll, any financial links to other people, county court judgements or decrees, and all credit products you’ve held for at least the last six years – plus whether you’ve paid on time.
It’s important to check for errors on these files, at least once a year, or before any major application, as even small problems can kibosh applications.
During a programme once, I managed to work out the reason one woman kept getting mortgage rejections came down to a problem with an incorrect address for a contract mobile phone she no longer used.
There are three credit reference agencies, and all have files available online. Check them all. There are lots of ways to access these – I’ve focused on the easy, free ways:
“Hold on, I do have a credit score, I know what it is!” – that’s a common response.
Years ago, credit reference agencies’ commercial focus was to make money from providing info to lenders. Consumers’ legal right to see their information was a pain they had to suffer. Then some bright spark realised the public was an untapped source of revenue and started looking at things to sell or market to them.
A big one was a credit score (leveraging people’s residual knowledge that this is real in other countries). That’s why they now give you a seemingly important number – for Equifax it’s out of 700, TransUnion 710 and Experian 999 – that apparently dictates your financial life.
The first clue that there’s no one universal credit score is that it is different for each firm! Each lender scores you differently.
When you apply for credit, each lender does its own individual assessment of you, using its bespoke scorecard. It’ll plug in all the data it has about you – from your credit file, the application form and any past dealings you’ve had with it – in order to work out whether you’d be a profitable customer.
Note I’m talking about profit here, not risk. While risk’s a big factor – someone who has a history of defaults is likely unprofitable for most lenders – although it’s not the only factor.
A bank may be offering a loss leading credit card in order to cross-sell customers a mortgage, so its actual scoring may factor in how desirable you are for that. The secretive nature of credit scoring makes it difficult to ever truly know.
So the credit score you get given is just a rough model. The number you’re given is in fact just the credit reference agency’s indication of how a typical lender might view you based on your credit history.
Useful, but not gospel (more like guess-pal) because each lender has its own scoring system; and credit history is just one part of what lenders look at.
In fact, just as important as your credit worthiness for lenders is the affordability test.
For that, the single most important piece of information needed is how much you earn – and that’s something credit reference agencies don’t know and so isn’t factored in the score you’re given.
Take someone with an excellent credit history, who earns £50,000 and applies for a £5,000 loan. They’ll likely be accepted. If they lose their job, and keep repaying credit on time, their credit history won’t have changed for the worse – but with no income, they’ll likely be rejected.
So don’t sweat small movements, do worry about big ones which should be taken seriously. It’s a decent indication that your data has changed, suggesting you’ve committed a real credit sin such as missing a payment, going over your limit or defaulting.
If you haven’t then you need to find out why and check your credit file – it could be an error or identity fraud.
For far more help on this see my 27 tips to boost your credit acceptance at www.mse.me/CreditBoost
Martin Lewis writes for Shropshire Business magazine