Credit Scoring, Credit Reference Agencies, Credit Files Demystified

A recent survey by credit monitoring service Experian suggested that 95% of Britons were unaware of their credit rating. However the importance cannot be underestimated as your credit score will determine your creditworthiness.

Credit scoring is a tool used by lenders to help determine whether you qualify for a particular financial product such as a credit card. You do not have a single credit score or rating as different organisations take different information into account and have different algorithms when working out your score.

When you apply for credit, the lender will usually consult with a Credit Reference Agency to produce a credit score for you based on the information contained in your credit file.

Your score is based on information you provide on the application form on what is contained in your credit file. Your score is calculated by a mathematical equation that evaluates many types of information found in the credit file. The better your credit score (also known as credit rating), the more likely companies will be to issue you a credit card, loan or mortgage.

The information contained in your credit file (also known as a credit report) includes public information and credit account information.

Public information

Electoral Roll
Electoral Roll registration forms are sent out once a year to every household in the UK usually during August or September. The register of electors is then published on 1st December each year. Local authorities now update the Electoral Roll on a monthly basis – this is called the Rolling Register. Lenders access Electoral Roll information via a Credit Reference Agency to check names and addresses. Organisations also consider information on the electoral roll at previous addresses when making a lending decision.

Court Judgements
Details of CCJs are supplied by the county courts to The Registry Trust who maintain the statutory public register of CCJs. A court judgement on your credit file shows that you have been taken to court for not paying an amount you owe. Records of court judgements will remain on your file for 6 years. If the judgement is paid in full after the first month and you obtain a Certificate of Satisfaction, the judgement will be marked as being satisfied.

Scottish Decrees
Details of Scottish Decrees are supplied by the Sheriff’s Courts to The Registry Trust. The Registry Trust maintain a public register (by agreement with the Scottish Courts Service) containing all Small Claims and Summary Cause money decrees entered in the Sheriff’s Courts during the preceding six years.

Bankruptcies
Details of Bankruptcies are obtained from London Gazette or Stubbs Gazette. A bankruptcy order will appear on your report for at least 6 years.

Voluntary Arrangements
A individual voluntary arrangement (IVA) is a formal arrangement made through the court to pay an agreed amount off your debts over a shorter period. IVAs will be listed on your credit file for at least 6 years.

Credit Account Information

The main UK lenders and financial companies share details of their customers’ credit agreements. This means that when someone applies for credit, the lender can check they
have repaid other lenders in the recent past or are repaying current credit agreements. They can also check how much the consumer already owes to other lenders, to help them decide if the consumer can afford to take on further credit.

So that information can be shared, lenders store information about their customers with one or more Credit Reference Agencies and details of you current and past credit agreements will appear on your credit file.

What factors affect a credit score?

Many different formulas are used to calculate credit scores, but most are based on the following factors:

Public records. Bankruptcies, county court judgments, and IVAs on your credit file may lower your score.
Payment history. A record of late or missed payments on your current and past credit agreements will lower your score. For instance if you have been in mortgage arrears, or were late paying a credit card bill.
Amount owed. Owing a lot of money will lower your score, especially if you're nearing your total credit limit.
Length of credit history. If you have no previous credit history, it is difficult to judge how good you will be as a borrower and this will likely have a negative impact on your score. A long history of borrowing will help improve your score, particularly if you have repaid money borrowed on time and without defaults.
New accounts. Applying for a number of credit accounts in a short space of time may have an adverse effect on your score.
Searches. Whenever a lender requests a credit search, it is recorded on your credit file. A large number of recent searches may lower your score.
Accounts in use. Having a high number of open accounts could harm your score, regardless as to whether you are using them or not.

Credit File Myths Dispelled

Credit reference agencies are not told which credit applications are successful and which are not. So the fact that you have been refused credit cannot be recorded on your credit report.
Credit reference agencies do not hold information about your race, religion, sexuality, political beliefs, employment details, medical history, Council Tax payments or criminal records. Nor do they hold information about savings accounts, other investments.
Shopping around for credit will not affect your creditworthiness, providing you simply get quotes and don't make lots of applications.
Previous occupants of your home will not affect your credit score. Credit checks are carried out on individuals and not addresses.
There is no such thing as a credit blacklist. The information credit reference agencies hold is purely factual and it is this information which lenders use to determine the outcome of your application. Using the same information, one lender may say ‘Yes’ but another may say ‘No’.
Credit Reference Agencies do not make lending decisions, and cannot tell people why an application for credit has been accepted or refused.

Getting a copy of information credit reference agencies hold

If you'd like to have a look at your own credit files, you can order or view your credit file with each of the major Credit Reference Agencies over the internet.

You have a legal right under the Data Protection Act 1998 and Consumer Credit Act 1974 to dispute the information that is held about you if you believe it is not correct. You can contact the Credit Reference Agency asking for the record to be amended.

Notice of Correction
If a Credit Reference Agency is unable to amend the information you have disputed because it is factually correct, you have a right to add a Notice of Correction to your credit file. The Notice cannot be longer than 200 words long and must not be defamatory, libellous, incorrect or frivolous. It allows you to explain the reason for particular entry on your file.

Equifax - www.equifax.co.uk
Experian - www.experian.co.uk

Article added: 05/10/06