Credit rating questions and answered

Loan file

A credit rating is calculated by any company that considers an application for credit. Click here to find out:

Credit ratings are used by lenders when deciding whether to accept an application for credit.

This could involve anything from a mortgage or loan, to applications for a credit card or a mobile phone contract.

But, during tough economic times, lenders are being more choosy about who they lend money to.

So, is there anything you can do to improve your credit rating?

James Jones, from credit reference agency Experian, answers some of your questions.

Q: I have a mortgage with Northern Rock. I am trying to transfer it to another lender to get a more favourable rate.

I took out a loan with First National in February 2005. I made regular payments of £120 per month for more than four years up until June 2009. Due to a change in bank accounts and address I defaulted on that date. I settled the full amount of £7,202 in October 2009.

I believe due to this default I am unable to get another lender. Please advise me what I should do to repair or improve my credit ratings. R Patel.

A: Defaults stay on a credit report for six years from the default date, so I am afraid yours will hang around until June 2015.

Do make sure you review your report to check the default has been updated to “satisfied”. If you want to explain on your report why the default occurred you can send a “notice of correction” to each of the three credit reference agencies – Experian, Equifax and Callcredit.

The negative impact that the default has on credit scoring will reduce over time and may eventually be outweighed by more recent positive repayment information. A reputable mortgage broker should be able to help you find a competitive deal based on your current circumstances.

Q: I currently have a rating in the green (excellent) zone however it is towards the bottom end.

As I have no debts, apart from a totally up-to-date mortgage, and have never been behind with credit card or council tax, why is my rating not higher? Ronald P Macleod.

A: You do not actually have a credit rating at all.

Each lender you approach for credit will calculate a rating for you based on the data available to them at the time and their own lending policies.

You can get a score from each of the credit reference agencies to help you understand how your credit report is likely to be viewed by a typical lender, and you have clearly done this with one of the agencies.

An excellent score is certainly good news for you but there is always room for improvement and the agency you obtained this score from should be able to give you some custom advice based on your actual data.

Do not forget, there are three credit reference agencies and lenders will typically use just one or two, so it is certainly worth reviewing all three credit reports from time to time. Local authorities do not currently share council tax records with the agencies, so you will not find this on your report.

Q: Companies are quick to report to the credit reference agencies when you default on a debt. Why are they not required to similarly notify the agencies when the debt is cleared?

I have had to take action myself to ensure that the three main agencies’ records are corrected after I have settled my debts. Trevor Austin, Havant, Hampshire.

A: Lenders are required by law to store accurate and up-to-date information with the credit reference agencies.

Information about live accounts is refreshed every month and the update process is the same regardless of whether an account is up to date, in arrears, just opening, or has been settled or satisfied.

Importantly, if you check your credit report and find an account that has not been updated for some reason, you can ask the credit reference agencies to contact the lender for you. While this is done, the entry will be clearly marked as disputed, until the matter is resolved.

Q: Does the number of times you have changed address affect your credit rating? Rosie Shaw, Cambridge.

A: While lenders will differ in what constitutes an ideal customer – a view they express in how they calculate people’s credit scores – there are some positive and negative characteristics that most will agree upon.

One of these is stability, which is seen very much as a positive attribute.

Statistically speaking, people who do not tend to move home very often are less likely to miss their credit repayments.

In a similar way, being with the same employer and at the same bank for long periods of time suggest that you can be relied upon more than people who chop and change these relationships.

But please do not let this stop you moving home, getting a new job or shopping around for a better bank account. All these things are relative and if the other information connected with your application paints a positive picture then you are still likely to be seen as an attractive new customer.

Q: I have applied for loans knowing I have a perfect credit rating and have been either offered a rate higher than the advertised rate or in some cases even turned down.

When asked why this is, the response is always that the lender uses its own processes combined with information from the credit reference agencies, which is no help at all.

If I know that my credit history is perfect, do I have any right to appeal against the lenders decision? I feel they are advertising one rate to get you to call them with little or no intention of ever offering the advertised rate.

It is particularly annoying when the search they do leaves a footprint which can then go on to affect your credit rating. Martin Torpey, York.

A: While a great credit history will definitely support your future credit applications, lenders will also look at the information you provide on your application form plus any information they have about you already.

They will have their own view of what constitutes an ideal customer and I am afraid if you do not fit the bill for any reason they can turn you away.

Industry rules do require lenders to tell you the principle reason for refusing credit – although you sometimes need to ask the question – and, importantly, if you have been refused solely because of credit scoring you have a right to appeal and have your application reviewed by a person.

By law, lenders must make the attractive headline rates they advertise available to more than half of all successful applicants, but that does mean that a lot may be offered less attractive deals.

Do not worry too much about credit search footprints. These do not usually affect credit scores unless you have collected quite a few over a short period of time and there is other information present that also paints a worrying picture.

Q: My husband and I are both cautious about the amount we spend. He has always been a saver and rarely purchased anything on his credit card. I tend to use my credit card for spending and then pay off in full each month. We are looking to buy a house next year, but will his lack of borrowing history affect his credit score and a possible mortgage approval? C. Smithston, Trowbridge.

A: When lenders check your credit report they look for evidence that you are a reliable customer. If you have little or no past borrowing history you may, as a result, be seen as somewhat of an unknown quantity, which will be reflected in any credit score the lender calculates.

I suspect your husband will have some credit history – his credit card should be on there for a start – but it would certainly be sensible for you both to order and review your credit reports soon.

You may well be surprised when you do this. The credit-data-sharing net has widened in recent years, taking in things like current account overdraft facilities, mobile phone contracts and even some utility agreements.

You will find plenty of advice on the credit reference agency websites on improving your credit history, including scoring tools (which may cost extra) that will rate your current credit reports to help you both see where you stand.

Q: I have now retired through ill health at 61. My income has dropped dramatically, so what happens to my credit rating? Currently I have no mortgage and no credit card debt; in fact no debt at all. Is it a case of lucky old me or, from a credit rating situation, am I a man who has nothing in the eyes of a credit rating company such as Experian? Larry Gee, Burnham-on-Sea, Somerset.

A: Sorry to hear about your poor health. Your credit report will continue to reflect what credit products you have and how you are managing them.

So, assuming you do have some credit facilities open to you at the moment – for example, a credit card, a mobile phone contract or a mail order account – you certainly have the opportunity to maintain an excellent credit record, which will support any future applications you make.

Most lenders use credit scoring to decide which customers to accept and they will feed other information into this too such as your income. As a result, it would be sensible to check the qualifying criteria closely before submitting future credit applications, as many do stipulate minimum income levels.

That way, if you do decide to apply for new credit, you can focus on suitable offers and save the time, effort and frustration of making wasted applications.

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