it is important that you credit yourself with good financial health when the time comes for borrowing
According to the Credit Action Charity, and their figures for June 2009, the average household debt in the UK is £9,280 and this excludes the biggest financial obligation, a mortgage, whereupon the figure increases to £58,370. The average debt owed by every UK adult is £30,500 (including mortgages), which represents 124% of the average yearly income.
Average consumer borrowing via credit cards, motor and retail finance deals, overdrafts and unsecured personal loans has risen to £4,850 per average UK adult at the end of April 2009.
It is certainly a time to be financially prudent, and as the credit crunch bites it is important that you credit yourself with good financial health not only in your own eyes but when the time comes for borrowing and managing your personal budget.
What is a “credit score”?
Whether you decide to get a mortgage, a personal loan or any insurance, lenders ‘score’ you to predict your likely behaviour. They give you a score as to how you match their preferred criteria. No two such lenders are the same as each competes for business and has a different attitude to what type of customer they want. You may well be an individual, but your credit scoring will have you pigeon-holed into being a particular type of applicant, whether that is your reality or aspiration or not.
It is essential therefore to be financially attractive to the lender you want from the outset. This is in fact a two way process, as sometimes you just are not what they are looking for, at the very extreme a few lenders may crave those people with poor credit histories as they can charge more, who may well be able to keep up monthly interest payments but never repay the core loan itself. Quite simply you might not make the lender any money, and a lender might not want you if you can repay your credit card in full! There is always someone else for them to lend money to. Perhaps what our experience has shown us in the last 12 months is that many a bank and other financial institutions exist to make money for themselves.
The opening statistics from Credit Action are proof of the pound pudding so many people have eaten.
What information can the lender have access to?
That is not say that borrowing money itself is reckless – that is not the focus of this article. What we are discussing is your financial profile and how it is perceived.
There are three prime sources of information used for credit scores.
1. The application form. Here, lenders obtain the crucial details of your postcode, salary, family size, reason for the loan and whether you’re a home-owner. Ensure you fill the forms in carefully.
2. Past dealings with the company. Companies use any previous dealings with you to help assess your behaviour, though complicated data protection rules can limit which separate units of a company can communicate to each other.
3. Credit reference agency files. Such agencies compile information, allowing them to send data on any UK individual to prospective lenders.
All lenders use at least one agency when assessing your file. This data comes from five main sources:
1. Electoral roll information. This is publicly available and contains details of who lives at each property. Actually it is not to say that you have to vote, but it is deemed to be a reliable indicator of your permanent home.
2. Court records. County Court Judgements (CCJs) and Bankruptcies indicate if you have a history of debt problems.
3. Linked data. This includes records of other lenders who have searched your file when you have applied for credit, previous addresses and other lenders you have used in the past. It used to be that companies shared data about your defaulting on payments but now the “full” data includes your available credit, actual debts, and whether you’ve missed repayments, and the amount you repay.
4. Fraud data. If you’ve committed a fraud (or someone has stolen your identity and committed fraud) this will be held on your file under the CIFAS section.
5. Account data. Banks, building societies and other organisations compile details of all your payments and transactions on credit/store cards, loans, mortgages, bank accounts and mobile phone contracts.
What information does lender not have?
Lenders do not know which applications you have made in the past have been declined, but there is no smoke without fire, so if you have made several in a short time this will flag warning signs.
The application form is crucial with regards to your salary, hence the importance of checking that the correct information in that regard is included. Lenders, particularly with regards to mortgages will probably ask for proof in the form of wage slips (the last 3 months’ or more at the time of the application). Unless you have had a County Court Judgement against you, the lender will not know if you have a student loan. No criminal records are listed although incidents of suspected fraud in making the application will be noted, as discussed later. Parking or driving fines, are not credit issues, medical issues and information on relatives are not included.
How can I check my financial status?
You have a statutory right under the Consumer Credit Act to write and get your file concerning your credit rating. There are 3 such agencies dominant in the UK, their addresses follow at the end of this article. If applying by post simply enclose a cheque for £2.00 and request your credit report under section 7 of the Data Protection Act 1998. You can also visit their respective websites for a trial period in some instances, and there are several sites on the internet who a free trial period and will compile information from all 3 agencies for you. Checking your financial health is itself a business opportunity.
It is certainly important to check your rating on a yearly basis or before making an application. The lender will not know about it, and there may be errors, which restrict the products and services available to you as a result.
Check your present and past address details. Errors here can lead to you being judged by someone else’s details, for example on a previous address.
If you disagree with anything on your file, write to the agency and request that it is changed. Unfortunately, sometimes it may refuse to amend your file. If this happens you are entitled to add your own comments as a ‘notice of correction’. Be direct and focused – perhaps bullet points work best. This will often mean your credit applications take longer, but it may help you to obtain better deals.
When you apply for a product, the lender will want to know that the application is legitimate. Therefore, as well as the credit reference agencies, lenders also use completely separate anti-fraud agencies. There are 2 prominent organisations in the UK. “National Hunter” (http://www.nhunter.co.uk/) highlights inconsistencies on application forms, between your current application form and any past applications you have made, flagging up factual errors. The system is looking at facts, not explanations. There is a crucial distinction. For example, you may not have used a particular credit card in your possession for five years, but if the account is still listed as open and you had a different address this can hinder applications due to ID checks.
Lenders are not allowed to reject you based on the National Hunter alone, but it may lead to other searches being made. Changes to guidance introduced in 2009 mean lenders are supposed to tell you if National Hunter has been a contributing reason for your rejection.
You can make a data protection request for £10 to National Hunter to find out what information you have used in past applications, which can be useful also to check for ID fraud. National Hunter will not rectify any errors, for that you have to go back to the original lender with the information which you have now discovered.
The second such body, the CIFAS (the UK’s Fraud Prevention Service) (http://www.cifas.org.uk) keeps record of known fraud. It is the organisation to contact if you have been a victim of ID fraud. Importantly, any fraud committed at your address could appear on your CIFAS file, even if you did not commit the fraud. If you do disagree with the information, you need to contact the company that logged the information on your CIFAS file first, and then the CIFAS if you are not happy with the response.
FACTORS WHICH DAMAGE YOUR CREDIT SCORE
Several of the excellent websites set up to assist the consumer, including www.moneysavingexpert.com and www.debtadvicebureau.org.uk concur on the following as being points to address right now and to monitor in the future.
Not on the Electoral Roll
If you are not on the electoral roll at the address on the application there is a high probability of rejection. Write to your local council to ensure you are.
Bad or No Credit History
According to the Debt Advice Bureau, past credit history usually counts for 35% of your credit score. It is not just having County Court Judgements (CCJs) or defaults on your credit report that has a negative impact. Missed and late payments will also dent your score. Credit scoring tries to predict your behaviour. Communication is a them in this article, and you should contact the lender to let them know what has happened. Changing your repayment schedule is preferable to you defaulting, and though it will hit your credit score, it iss better than a County Court Judgment (CCJ) against you.
Simply marrying or living with someone with a bad credit score should not impact on your finances, as third-party data does not appear on your file. However if you are ‘financially linked’ to someone on any product, it can have an impact, for example a joint bills account for flat sharers can mean you are co-scored. If one partner has a poor history, keep your finances separate, and it should maintain access to good credit for the other.
At Current Address Less Than 3 Years
Stability and continuity are important. A score will be higher if you have been at the same address for 3 years or more. There may be some impact if you have had two addresses in the last 3 years, but probably less if you are a homeowner. Multiple addresses in the last 3 years will have the greatest impact. Likewise, your credit score may be effected if you have been at your current address for less than 6 months. This means that tenants are most likely to fall foul of this scoring criteria. Putting a fixed (land) line rather than a mobile number on application forms can help with security checks and improve your chances.
As with residency, when it comes to employment, continuity is also paramount. Ideally, lenders are looking for someone who has had the same job for a number of years. Such applicants will benefit from the maximum score for this. Changing jobs so as to get more pay will usually not cause any problems, though you really want to have been in your new job for a few months before applying for new credit, lenders often ask to see the last 3 months’ pay slips when applying for a loan. If you are about to take time off, go on maternity leave or suspect potential redundancy, apply beforehand – though never lie on applications, if asked.
No or New Bank Account
Lenders will award maximum points if you have been with your bank for a number of years. Having only recently opened your current account will reduce the score. Not having a bank or current account will be most detrimental to your credit score.
Too Many Credit Applications
Every time you apply for credit a search is made and will be recorded on your credit file. Multiple credit applications in a short space of time will negatively impact your credit score. Such applications may be perceived as indicative of someone desperately trying to obtain credit.
It is commonly accepted that making one credit application every month or two should not have too much impact on your credit file. However, if you have recently made a number of applications and been declined, it is advisable not to make any new applications for six months so as to give a good breathing space before applying again. As we said earlier whilst a lender might not know the outcome of your applications, the number made would indicate a spiral of being declined.
To avoid this spiral if you are rejected once, immediately check your credit score. It is possible after an error to get successive searches wiped, but it involves negotiation both with the agency and the lender and can take time and bring frustration.
TAKING POSITIVE STEPS FORWARD TO YOUR CREDIT
Get a ‘quotation search’ not a ‘credit search’.
If you’re just trying to get a specific quote for a loan, ask the lender to do a ‘quotation search’ and not a ‘credit search’. This means the enquiry won’t have a negative impact on your credit score.
Dealing positively with defaults on your file.
One of the major problems people face are past debt defaults on your file, these can easily hamper most applications to get new credit and if they are genuine and fair are tough to deal with. There are a few things you can try though especially if the default is unfair.
Complain to the Ombudsman. First write to the company and complain the default isn’t fair and lay out your terms. Ask it to wipe the fault from your file, which it can do if it’s disputed. If that fails, complain to the Financial Ombudsman (http://www.financial-ombudsman.org.uk) 0845 080 1800 the free independent arbiteur of disputes, it can rule both that the debt is unfair and that the default can be wiped.
Negotiate with the lender. If you are prepared to settle the debt, either in part or in full, then you can enter a negotiation with whomever you owe the money. As part of this you can make a condition of settlement that the default is wiped off your credit file. Companies are allowed to do this for disputed defaults.
As we said earlier (what to do if there is an error), add a ‘Notice of Correction’. If all else fails, and you believe the default’s justifiably unfair, add a notice of correction to the file explaining the problem eg,saying: "It was a joint account and the debt was run up once I no longer had access by my errant ex-husband/wife." This will slow applications down, as most companies will look at it manually, but as a substantial default is likely to stop you getting credit anyway, that’s usually not a problem, providing it helps.
Cancel unused credit cards, debts and accounts.
Access to too much credit, even if it isn’t used, can be a problem. If you have a range of unused credit cards, cancel most of them; this lowers your available credit and should help. However long standing bank accounts with good credit histories can be a benefit to your credit score, so they’re often best left open.
Use any savings to pay off debts.
The amount of outstanding debt you have is part of the info lenders have access to, so minimising this is a clever strategy. In general, you’ll be better off by using savings to pay off expensive debts anyway. So if you have savings, and can use them to significantly lower your mortgage borrowing, enabling you to get a better deal, it’s often worth doing.
ADDRESSES FOR CREDIT SCORES
Credit File Advice Centre
PO Box 1140
Consumer Help Sevice
PO Box 8000
Consumer Services Team
PO Box 491
Leeds LS3 1WZ
Guide published 23 June 2009.
by David O’ Neill
The above article is meant to be relied upon as an informative article and in no way constitutes legal advice.
For legal advice regarding your case, please contact Cartwright Adams Solicitors on 0207 887 7556 for a Consultation with a Solicitor.
Cartwright Adams Solicitors
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