'I'm not a number, I'm a free man" – er, no, you're a number. Credit scoring is an ever–more important part of everyone's financial lives, not just affecting the obvious, such as credit cards, mortgages and loans – but also your ability to get monthly car insurance, contract mobile phones or switch your energy supply from pre–paid key meters.
We're all "prisoners" of the system. Yet pay attention to how scoring works, ignore the myths and manage it properly and you can substantially increase your chances. Here are the 20 things everyone needs to know.
1. You don't have a single credit rating
No one in the UK has a universal credit rating or score, nor do credit blacklists exist. Each lender scores you differently and secretly. Rejection from one doesn't automatically mean rejection from all. Of course, many firms adopt similar approaches to those who've had past problems, so it may feel as if there's a blacklist; but some lenders specialise in (usually high–charge) lending to those who present a risk.
2. Credit scoring is about behavioural prediction
When you apply for a product, lenders pour the data they have on you into an algorithm which attempts to predict your future behaviour based on your past. They then match that against their customer wish–list.
3. It's about "will you make them money?" – not just risk
Many money–savers contact me incensed by a rejection: "I've a perfect credit score, never missed a repayment, why on earth did they reject me?" This is based on a view that credit scoring is solely about whether people are good or bad risks. In fact it's about profit.
Of course, a bad risk is likely to be seen as unprofitable by many. Yet good risks may still be unprofitable. It could be that you're applying for a hot credit card cashback deal, but their aim is to build a customer base to cross–sell mortgages to, and you're not suitable for that.
4. Credit scoring dictates rate, too
Most lending is now "rate for risk". Watch for the word "representative" before APR. That means lenders only need give 51pc of accepted customers the advertised rate – the rest can pay more. So even if they advertise a 6 per cent representative APR, your credit score could mean you're offered 40 per cent.
5. The system is anti–shopping around
Too many applications, especially in a short space of time, can have a negative effect on your future score. This is a catch–22 as if you get rejected, or the rate you are offered is poor, you'll want to keep applying to see if you can get a better deal, but at the same time your chances will start diminishing. It's something I've railed against for years, including in evidence given to House of Commons select committees, but politicians have done little. So eventually I tried to do something myself…
6. Find your odds of acceptance in advance
The reason applications mark your file is that many lenders unnecessarily use "hard searches", which other lenders can see. They could use soft searches, which you can see on your file but other lenders can't – so there's no impact on future credit–worthiness.
Using this, we built a free Eligibility Checker – see moneysavingexpert.com/eligibility – which can currently be used for credit cards, but will soon be available for loans and hopefully more. It uses a soft search to map your score against lenders' criteria, and shows your percentage chance of getting different products, so you can hone in on the right card, minimising applications.
7. Inconsistent applications can cause rejection
Lenders use two anti–fraud agencies to weed out problems. CIFAS, which is simply a record of known fraud, and the less well known National Hunter. This more subjective system tries to spot fraudulent applications. For example, inconsistences between application forms from different institutions can hurt. So if you've got more than one mobile number or job title, use the same one each time.
8. Check all your credit files annually or before any major application
The three credit reference agencies, Equifax, Experian and Callcredit, have files containing lots of data on each of us. Errors on these can kibosh applications.
Check all three regularly, line by line. Even something innocuous like an old, but technically still live, mobile phone contract which you forgot to update to your new address could in some circ*mstances stop you getting a mortgage. You've a statutory right to check your files either at no cost or at the most, £2. Callcredit has a free service (noddle.co.uk), and both experian.co.uk and equifax.co.uk offer month–long free trials of their expensive (and overkill) credit monitoring services; so grab those, view your files then cancel the trial.
More on this, including how to get paid to do it, is at mse.me/checkfile.
9. Take "pay to see your credit score" sites with a giant pinch of salt
Credit reference agencies used to make their cash by selling your info to lenders, now they flog it back to us, too. While credit files are crucial, the credit scores they sell have two flaws. Each lender scores you differently – so a universal score is a strange concept. And the score only looks at the info on your credit file.
When lenders score your application, any past dealings they've had with you will have a huge impact. So at best this is just a lightly indicative, though sometimes useful, notion of what's good or bad on your account – but not a musthave credit management tool.
10. Boosting your credit score is a bit like going ''on the pull''
Imagine Cara Credit and Lara Lender are out on the town. Neither likes overweight men, both like thick hair and good looks, but Lara likes intense, stubbly guys, Cara prefers clean shaven with a sense of humour. There are lots of guys they would both reject, but they don't always like the same men.
Credit scoring is the same. Different lenders want different things. One rejection may not be a rejection by all.
However, there are some things that tend to make you more attractive to most, and that's the best we can do – it's more art than science.
11. Avoid the rejection spiral
Check your file after unexpected rejections. If it's caused by a file error and you continue to apply – even if you get the error fixed – you may continue to be rejected anyway due to all the applications.
12. Time it right
County Court judgments and bankruptcy stay on your file for six years; applications one year. So if they're soon to lapse, hold off on new applications until they have.
13. Beware credit–card cash withdrawals and payday loans
Both are usually seen as evidence of poor money management and can hit your credit score. While some payday lenders suggest repaying on time can boost your credit score, that's only true to a minor extent for those with already abysmal credit histories. In most cases it's a bad move: some mortgage underwriters openly say they reject anyone with them. If you're thinking, "but I only withdraw cash on a credit card when overseas", see mse.me/ overseasATM for info on that.
14. Perversely, you should use a credit card to (re)build a history
Those with little credit history, even if none is bad, are often rejected because they're difficult to predict. If you don't have a (good) credit history, build one. The easy way is with any credit card – just spend £50–ish a month on it – ensuring you repay IN FULL each month so that there's no cost (preferably by direct debit). The wobbler, here, is how do you get a credit card if you've a poor history? The answer is with a credit rebuild card. These have hideous 25–50 per cent APRs, but that's irrelevant as you're repaying in full. To find which are easiest to get, see mse.me/creditrebuild.
15. Check that you're on the electoral register
You can apply at gov.uk. And don't worry, you can still opt out of the Open Register, which is the version that can be sold for commercial firms to use.
16. Never miss or be late with any credit repayments
This can cause problems that cost you for years. Defaults in the past year hurt the most. So repay all debts by direct debit even if only for the minimum – then pay manually on top each month. That way you guarantee that you'll never be late with basic payments, but retain the flexibility to pay more to clear debts quicker.
17. Don't let your partner's or flatmate's score wreck yours
It's not whether you kiss, cohabit or are married that links your finances, it's simply if you have a joint mortgage, loan, bank account and in certain rare circ*mstances energy bills (though then only for couples, not flat–sharers).
"Linkage" means that their credit history can be looked at when you're scored, so avoid it if one of you has a poor history. Equally, if you separate from someone you were joined to, write to the credit reference agencies and ask for a "notice of disassociation".
18. Cancel unused credit and store cards
Too much available credit, even if unused, can be a problem – so it's best to cancel some. Yet this must be balanced against the fact that one or two longstanding accounts with good credit histories will benefit your credit score with some lenders.
19. Evidence of stability counts
Putting a fixed line rather than a mobile on application forms can help with security checks and improve your chances. Being a homeowner rather than a renter, employed rather than self–employed, and a longer time spent at the same employer, bank and current address all help, too.
20. You can challenge unfair defaults
If your file shows you failed to pay, that's a credit horror story. If it's there in error you need to challenge it.
First complain to the lender and ask it to delete it. If that fails, write to the credit reference agency to add a concise and factual Notice of Correction to your credit file, for example: "It was for a pair of shoes from a catalogue firm and they never arrived." This will slow down applications, as most credit companies will review these manually, but slow is better than a "no".
Finally, make a complaint to financial–ombudsman.org.uk, which can adjudicate if the default is unfair and get it removed.
- Martin Lewis OBE is a broadcaster and the creator of moneysavingexpert.com
- Alerts on loopholes and rip-offs once a week: Telegraph Money Newsletter
