The importance of your credit rating

Your credit rating, or credit score, can have a major impact on your life. It started out as a way for banks and financial institutions to assess how likely you were to repay a mortgage or other debt. Today it is not uncommon for new employers and letting agents to want to check your credit rating before offering you a job or a lease on a flat.

Keeping an eye on your credit rating is highly recommended. It shouldn’t take long to do, and you only need do it a couple of times a year.

The good news is that there are several ways to do this online for free. The main providers are ClearScore and Noddle. There are also premium services costing £7-15 per month which offer real time monitoring and notifications of any new searches.

Factors Which May Affect Your Credit Rating

While your credit rating is based on a number of factors, the primary one is how you have used credit in the past.

Every monthly payment made to repay a loan, credit card, mobile phone contract or car insurance is a positive.

Being on the Electoral Roll is a key factor and it is highly recommended to register to vote as soon as possible at a new address.

Negative factors include missed repayments, exceeding agreed overdrafts for more than a few days, using pay day loans and being linked to someone with a poor credit rating.

Defaults, CCJs (County Court Judgements) and debt management plans can all have a major impact on your credit score.

How You Can Improve Your Credit Score

Here are a few ways to get a higher credit rating:

Review your credit record and correct any inaccuracies.

May sure bills and loans are repaid on time.

Register to vote at your current address and ensure all companies you have dealings with

Don’t apply for too many loans. If lenders see a lot of recent searches on your record it may put them off, or offer you a higher APR.

Live within your limits. If you already have a high level of debt it may be difficult to secure new credit on good terms.

Check who you are linked with. Remove connections with ex-partners, former flatmates etc.

Understanding the Key Terms

Credit history – this is a record of all your current and completed credit agreements within the last 6 years, along with your payment records.

Credit report – a detailed report of all your credit history, levels of debt currently outstanding, current and previous addresses, linked persons and any defaults, court judgements or convictions. It also shows all credit searches done on your account in the last two years.

Credit score – this is a number calculated based on your credit report. Each lender and credit referencing company will calculate their own score based on their own criteria.

Credit search (or hard credit check) – this is when you are applying for credit and the potential lender checks your credit report. This search (or footprint) is usually recorded on your credit report for 12 months.

Soft credit check – used to verify your identity and credit score. Does not leave a footprint on your credit report, but can be viewed by you.

For more information on this topic, see the credit scores and ratings page on the Mortgage Lounge.