Credit ratings FAQ
What is a credit rating, what does it do, and how does it affect you? Here’s everything you need to know about credit ratings and your credit score.
What is a credit rating?
When deciding whether or not to lend money to individuals or companies, financial companies like banks must be able to assess whether or not you’re likely to pay back the loan in full. Credit ratings are the system used to determine this.
Your rating usually constitutes a single score, which is calculated by taking into account a wide range of personal information about your financial situation and credit history.
What does it mean if I have a ‘good’ credit rating?
Having a good credit rating means you are more likely to be offered a loan or mortgage, and having a poor credit rating makes you less likely to be offered a loan.
People or companies with a good credit score will also find that they can access loans, credit cards and mortgages with lower interest rates.
What types of credit rating are there?
Credit ratings broadly follow two main models; individual and corporate. Individuals have a personal credit rating and companies have a corporate credit rating that exists independently of the directors and management team – although it may be influenced by their individual credit ratings in some circumstances.
Both individual and corporate credit ratings can be either short-term or long-term. Short-term ratings assess the likelihood that a borrower will default on a payment within a year, while a long-term credit rating looks at the likelihood of default at any point after that.
Banks and financial institutions themselves are also subject to credit ratings, which assess their overall financial health. Even countries are given a credit score.
How long have credit rating agencies been around?
Credit ratings agencies have been around for just over a century. The aftermath of the Great Depression demonstrated how important it is for banks to assess the credibility of a candidate before lending them money.
Who measures my credit rating?
Your credit rating is independently compiled by one of a number of credit rating agencies. In the UK, these are Equifax, Experian and Callcredit. There is no single universal credit score, and each of these companies will likely score you slightly differently based on their criteria and algorithm.
Lenders themselves will take multiple criteria into account as well as your credit rating when assessing your eligibility and the credit rating itself may differ depending on which agency they use.
Nonetheless, lenders tend to judge based on similar criteria, and it is unlikely that your eligibility will differ largely from one application to another.
What information is included in my credit rating?
This is the information that your credit rating contains:
- Electoral roll information: lectoral roll information includes general personal information that is used to identify you, such as your name, date of birth and residence. This is publically accessible information.
- Court records: This includes any information of dealings related to your personal finances you’ve had with the justice system. If you’ve defaulted on a payment and are taken to court, it is likely to influence your credit score. IVAs and bankruptcies are also taken into account here.
- Anyone who’s checked your credit rating: Anyone who checks your credit rating is included on the rating itself. That includes potential lenders and companies with whom you’ve had previous financial dealings.
- Your past financial dealings: This includes any past associations with phone companies, gas and electricity companies, loans, mortgages, bank accounts, credit cards or energy contracts. Some lenders also share the amount of money you’ve paid off on loans previously; whether you’ve met the minimum payment threshold or paid off the entire debt in full.
- Fraud data: If there are any details of you having committed fraud, or anybody having done so under your identity, then this will also appear on your credit report.
What is not included in my credit rating?
Here are some of the things that credit rating reports do not know about you:
- Student loans: Your credit rating contains no information about any student loans taken out since 1998: when you took it out, how much it is worth, or how much of it you repaid. The only way information from these student loans can appear on your credit rating is if you’ve been taken to court in connection with the repayments. Those who started university before 1998, however, are eligible to have information passed on to credit agencies.
- Declined applications: Your credit rating can show someone how many times you’ve applied for credit, but it won’t detail whether these applications were successful or rejected.
- Your salary: Your credit rating doesn’t detail how much money you are paid, only how responsible you have historically been with the money you have. However, lenders may still ask for this information independently as part of an application.
- Personal information other than name, age and address: This includes race, religion, ethnicity, sexual orientation or your marital status. Your medical records and criminal record are also excluded. A bank or lender is still entitled to ask for any of this information independently in a credit application, and it may still affect your likelihood of being accepted for credit, or the interest rate you’re offered.
- Credit, bills or bankruptcy information more than 6 years old: Most information is wiped from your credit score after 6 years. This includes any information about when and how reliably you’ve paid phone and utility bills, any defaulted or missed payments, or whether you’ve ever been declared bankrupt.
How can I check my credit rating?
There are multiple ways to check your credit rating. First of all however, you must make sure that you’re on the electoral roll. If you’re not, there’s a good chance that the credit agencies won’t have enough information on your personal identity to be able to establish a reputable credit report.
You are able to view your credit rating from any of the three providers, Experian, Equifax and Callcredit, and this right is enshrined in law. You can usually buy a comprehensive credit report from these companies for as little as £2.
Other credit reference agencies will compile, organise and adapt this information, giving you a clearer idea of how to interpret this information, and therefore how to improve on it. They may charge more for this service.
How do I improve my credit rating?
There are a number of ways that an individual can improve their credit rating. These steps are by no means a guarantee of improving your credit rating or being confirmed for a loan or mortgage but they have been shown to help in some cases.
Here are a few factors that can have a positive impact on your credit score:
- Register to vote: Since electoral roll information is part of your credit score, signing on to the electoral roll may help improve your score.
- Pay bills on time or set up direct debits: Increasingly, bill information such as phone contracts and utilities is considered when compiling your credit score, so ensuring these are paid on time may improve your score. Setting up direct debits is seen by many people as a convenient way to ensure bills are paid on time without having to worry about it.
- Stay within credit limits and pay credit bills on time: Always ensure you make at least the minimum repayment on your credit card or loan, and avoid borrowing more than you can afford to repay.
- Don’t apply for credit regularly: Your credit rating accounts for how many people have checked your credit score. People can tell therefore, from your credit report, how many times you’ve applied for credit previously. Too many applications can suggest that you are reliant on credit.
What does my credit score affect?
Your credit score will affect you in a number of financial areas:
- Mortgage: If you’re looking to get a mortgage at some point in the near future, it’s vital that you have a good credit score.
- Loans: Banks will also pay careful attention to your credit rating when you apply for a loan. Your rating will likely influence the rate of interest you’re offered on your loan – those with bad credit ratings are likely to pay a higher interest rate.
- Mobile phone contracts: Having a phone mobile phone on a contract will influence your credit score. But your credit score will also be taken into account when you apply to take out a phone on contract. Those with a poor credit rating may not be offered a phone contract. Those who have had a contract for a long period of time and have a good history of paying on time could see improvements in their credit scores.
- Car and home insurance: Car and home insurance providers will also check your credit rating, particularly if you decide to pay your insurance package monthly rather than annually.
Can I still get rejected by lenders if I have a good credit rating?
Having a good credit rating isn’t the only criteria lenders look at when you apply for a loan or a financial contract. Banks and other lenders take multiple criteria into account when considering whether or not to lend to you. Among the things they look at are your personal application and your salary, which aren’t included in your credit score.
Caroline Ramsey is a content creator who specialises in personal finance. More than a decade of working in editorial teams, she offers highly tailored content covering a number of topics. Read more