© Nick Shepherd

Credit rating organisations are the unholy trinity — immortal, invisible but not always wise.

The average consumer might not have heard of Experian, Equifax and TransUnion, but these companies can see into our financial souls, holding data on the personal finances of almost 50m adults in the UK. They can use our borrowing history — including any past mistakes — to predict how likely we are to repay in the future.

Credit rating agencies base their judgments on an array of financial records, from defaulting on a gym membership contract to how often we pay off our credit card bills in full.

Their algorithms calculate a personal “credit score” which ultimately determines which of us will qualify for financial products including mortgages, credit cards and mobile phone contracts. How the credit agencies decide our creditworthiness is a mystery to most people — but we disobey their hidden commandments at our peril.

Here, FT Money explains how your credit score is calculated, what you can do to boost yours and how even the wealthiest Britons are at risk of “credit invisibility”.

How credit scoring works

Gone are the days when thrift, a steady income and substantial assets counted towards getting a loan from the local bank manager. Now, becoming a regular and reliable borrower is the only way to impress. Millions of people — young and old — fail to tick this box, often through ignorance of the rules.

Our individual borrowing record is the key element in the credit scoring systems that predict how likely we are to repay a loan. Establishing this is a lifetime endeavour. We first appear on record when our names are added to the electoral register at around 16 years. Information builds as we open a bank account and begin to borrow. Failures to make repayments on time — no matter how small — count against us. Yet our income and savings — no matter how large — do not even register.

Failure to grasp the basics of credit scoring means we could be excluded from mortgages and other mainstream financial products even when we know we can afford the loans. Algorithms can judge us to be risky propositions even when we have never reneged on a loan payment or got into debt.

“A good salary and big house do not predict behaviour,” says James Jones, head of consumer affairs at Experian, the UK’s leading credit reference agency. These facts will also not be on your credit record.

This means that some wealthy people have very thin credit records. This applies especially to older people who have repaid their mortgages and those who have worked overseas.

According to research from Experian last November, almost 6m people are invisible to financial companies because there is insufficient information about their financial dealings. This means they may not be able to get credit, including something as simple as a mobile phone contract, or be charged much higher rates of interest.

The “invisibles” include young people who rent their homes, spouses who are not listed on joint accounts or utility bills, those who pay for major purchases with a debit card, not a credit card, plus older people who applied for credit card accounts decades ago.

“The obvious impact of being financially invisible is a low credit score and limited borrowing options, certainly at competitive interest rates,” says Mr Jones.

“Unfortunately, for millions of people in the UK, a lack of information might be hampering their access to mainstream financial services, leading to a scenario where people are paying more for goods and services and have much less choice.”

Over the years, the data held on consumers has expanded from catalogue and credit card debts to include loans, mortgages, domestic energy bills, broadband and television contracts — but there are still significant gaps.

For example, paying your rent on time to a private landlord is not used as an indicator of how reliable you might be at paying a mortgage. Last October, Experian started to add housing rental records to its database. So far, it has details of 1.5m housing association and local authority tenants. Credit reference agencies are still exploring how to add data from private tenancy agreements, not to mention council tax bills and online banking apps to reflect modern payment habits.

Why have I been refused credit?

Being “invisible” is one reason why we might receive a knockback from a lender, but evidence of a credit default can also be to blame. A great many of these “defaults” involve tiny amounts of money.

Applicants may have cancelled a direct debit too hastily when they changed their phone contract, utility company or gym membership. Alternatively, they may have failed to set up a direct debit, and been late paying their bills as a result. It is easy to do — an alleged underpayment sent on a paperless bill may go unnoticed, or a “failure to pay” letter to an old address may lie unread.

Sometimes the bad record is not the customer’s fault. The credit reporting system is automated. It works on a “data sharing” basis; agencies receive information — good or bad — with no human mediation. While financial companies make mistakes, it is up to consumers to notice these and demand they are corrected.

But if the error is your fault, how long will this “bad” information stay on your credit file?

One City executive, who had left behind an unpaid gas bill when he graduated from Oxford university, was about to apply for a mortgage and was nervous that he would have to tell his future wife and father-in-law about his irresponsibility. However, defaults usually remain on record for only six years, so his student sins stayed in the past. He could have found this out for himself by checking his credit file.

Gareth Shaw, head of money at the consumer group Which?, says that doing so can provide an important window into your financial health and help identify areas that need improving as well as mistakes that need correcting.

“While the scoring system that is used by these agencies can provide a useful insight into your creditworthiness, ultimately it is lenders who decide whether or not your applications for credit will be successful,” he adds.

What’s the score?

Everyone should know what is on file about them. You can find out free of charge and use the information to learn how to improve your credit score — but be aware that all three agencies present the results slightly differently (see box below).

A statutory credit report will provide consumers with access to details about their credit accounts, missed payments and the people who they have financial links to.

“It is a one-off snapshot of their credit report and credit history, containing financial information that lenders will use to make a decision when they receive an application for credit,” says Dave Webber, director of data strategy at TransUnion.

“The consumer can also request to see their detailed credit file, which contains the same information as provided to lenders.”

What a credit score is trying to do is predict your future behaviour. If you have defaulted in the past, your risk of doing so in the future is judged to be higher. You may be refused credit, or charged a higher price for it.

Lenders will ask a credit reference agency to issue a report when you apply for a new product. They should give the reason for refusal if asked — but typically, they will tell consumers to take it up with the credit reference agency that gave them a low score.

So how can you boost your score? All credit agencies see it as a positive if you are on the electoral roll, as will the lenders they provide data to — it proves you are who you say you are.

Experian, which scores consumers out of a maximum of 999, says that being registered may add 50 points to your score. Having a bank account registered to the same address and being named on household bills fattens out your credit file.

Having a credit card balance of £50 or below can be worth 60 points. Keeping credit card borrowings below 30 per cent of your maximum limit could be worth 90 points.

Defaulting on an account reduces the score by about 350, a county court judgment could cut 250 points and missing a payment 130 points.

These are all logical conclusions to draw. However, other ways of improving your credit score could turn out to be very costly.

For example, paying your car insurance premium in monthly instalments instead of an annual fee is likely to add 20 points to your credit score, but with interest charges of 30 per cent plus, this is an expensive way of improving your creditworthiness.

Not having products like credit cards is also something that will limit future lending decisions — which could come as a shock to those who are careful with money.

Experian says that having only one credit account in your name that opened within the past 18 months reduces your score by up to 75 points.

Those with limited or poor credit history can apply for “credit builder cards” such as Vanquis, but the interest rates on these can be expensive — Vanquis charges nearly 40 per cent, whereas mainstream credit cards generally charge less than 20 per cent.

To improve your credit score, and avoid hefty charges, you should build up your record by spending small amounts of money on your credit card, then repay any borrowing in full each month.

Couples should also be wary of how joint credit cards are treated. The main cardholder has full responsibility for the account and a second holder therefore does not build a credit profile.

Quick credit facts

  • Addresses are not blacklisted. The credit record of the previous owner or tenant does not affect any applications for credit

  • Sharing a property with someone with a chequered credit history will not affect your record unless you have a joint financial account with them. However, this could include being jointly named on household bills

  • You should close old credit cards that you no longer use. Lenders want to be sure that you can afford more credit.

  • Borrowing up to the limits of several credit accounts may indicate that you are over-extended

  • While the credit scores are used by lenders to give insight into creditworthiness, it is the lender who makes the decision on whether to say yes or no

  • Checking your credit record regularly does not damage your credit score

How to clean up your credit history

An application for credit remains on your file for months, so it pays to do your homework and check your file before you apply.

Credit agencies and price comparison websites offer “eligibility checkers” — also known as a “soft” application — which will indicate your chances of being granted a given product. These can also be used to check whether you are given the advertised rate before applying.

Unlike a “hard” application, where the consumer applies for credit, “soft” applications will not show up in the future. A “hard” application will be seen by other lenders and can affect future decisions. Experian says the very fact that there is evidence of another credit application within the previous six months could knock 40 points off your credit score — regardless of the first lender’s decision.

Experian estimates that less than 1 per cent of people who apply to access their credit records find an issue that requires data to be changed. But considering the vast amount of records it controls, this is still an issue affecting many thousands of people.

Unfortunately, rising rates of identity theft and financial fraud can cause huge damage to an individual’s credit records.

Consumers have the right to have inaccurate data corrected, and can even seek compensation if they suffer damage as a result of incorrect information. New GDPR rules have helped to open up this route, although there have been no court cases to date.

If you flag up an error with a credit agency, lenders are asked to check their records. If they find a mistake, they are expected to correct it. If the lender maintains its record is correct, the customer can add a “notice of correction” of up to 200 words to detail how a default or missed payment came about. Mr Jones says this is useful where an item is “factually correct” but gives a misleading impression.

“A single late payment will have an effect, but there can be mitigating circumstances such as illness or bereavement that explain what happened,” he says.

Experian says that if it raised a dispute with a lender and got no reply, it would delete the entry from the credit report.

In our increasingly digital age, consumers need to understand how the credit scoring process works to ensure they get the best deal — and not rely on a wing and a prayer.

What happened when I checked my own credit score

It is probably 20 years since I last checked my credit records, and I was impressed by the ease of doing so online via the three main UK credit agencies — Experian, Equifax and TransUnion (the owner of Noddle).

It is easy to check your score, but you will need to prove who you are by answering a series of questions about your identity and financial relationships with banks and credit providers, such as the dates you applied for credit.

I was pleased to get the maximum 999 score from Experian. Equifax scored me at 538 out of 700 saying this was “highly predictive” that I would be a strong candidate for credit. Its UK average score is 380.

And Noddle gave me a score of 683 out of 710 after I identified the date of my last mobile phone contract and my last credit card application. It told me the average score for my area was 622 and for the country as a whole it was 615.

My earliest account listed was a Marks and Spencer credit card from 1986, then my mobile phone and current accounts from early this century. However, my main credit card — a Barclaycard which I applied for in 1974 — did not appear on any of my reports.

It felt satisfying to see that I had paid off my credit card balances in full every month, going back years. And I was pleased to learn there were no defaults or incorrect information recorded on my files.

However, my file showed that I had been subject to an identity check in January to comply with anti-money laundering regulations by Onfido Limited. I had never heard of this company — but this turned to be when I applied for the Monzo banking app.

Checking your credit file used to cost £2 and take around seven working days. Last year when the General Data Protection Regulation was implemented CRAs were compelled to tell us what they had on their records for free.

In recent years Experian and Equifax have also offered a free trial 30-day trial of their monthly subscriptions, which customers have to remember to cancel. I ended up signing up for Equifax, which has twice told me that there has been no suspicious activity on my account. I will have to cancel next week or pay £7.99.

Users are still pressed to take out monthly subscriptions to access a greater range of digital services.

Credit agencies can also make money via referral fees if we apply for credit products via their digital platform.

Since I asked for my credit score, Noddle has sent emails telling me that I may be eligible for personal loans from Tesco Bank and Sainsbury’s Bank, and has also asked me to review its service on Trustpilot.

Copyright The Financial Times Limited 2024. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article