What you need to know about your credit history

As a Credit Union, we often get asked about credit scores and credit history. There seem to be lots of myths and misconceptions around the topic, so let’s clear them up…

What is credit history?

Let’s start with the basics. Your credit history is information about your past financial behaviour, including borrowing. in essence, banks and other lenders use your credit history to measure how risky you might be to lend to. Your history shows whether you have kept up with your financial commitments in the past, and your current track record of making loan repayments on time and as agreed.

Lenders such as banks, credit unions and even mobile phone providers will often use your credit history as a way of assessing your ability to repay debt. Depending on what information they find in your credit history, they will reach a decision about whether to lend you money or to offer you other types of credit – such as a mobile phone contract. Sometimes they may also use it to decide how much interest to charge you.

You may have heard of a few different terms when talking about credit…

• Credit History– All your previous borrowing and repayments. This shows your track record of keeping to the repayment terms agreed.

• Credit Score– A number between 300 and 850 that summarises your creditworthiness. Generally, the higher the score, the less risky you look to lenders, which may mean you are more likely to be accepted or offered a lower rate of interest.

• Credit Report / Credit File– A full statement of your credit activity and current credit situation for the past seven years, such as loan repayments and the status of your credit accounts.

What’s in my credit report?

Your credit report includes information recorded about your payment patterns, borrowing history and other financial factors that have occurred in your adult life. Some specific things your report will include are:

• Whether you pay your bills on time
• How much debt you have
• How many times you’ve applied for credit
• How much of your available credit (such as credit card limits) you are currently using
• Whether you’ve missed any payments
• If you’ve had any County Court judgments (CCJs) filed against you
• Your current address & previous addresses
• Any other applications you have made, for example, phone contracts, car finance, and so on.
• Any time a company has checked your credit record in the last two years
• Financial links with anyone you share an account with, for example, a shared mortgage

Why is it important to have good credit?

The most obvious reason for having good credit is to make sure you are able to take out loans and credit cards. But there are other things that your credit can affect that you may not have thought about…

Borrowing

Those with a low credit score or with defaults on their credit file will most likely find it very difficult to take out a loan, overdraft or credit card. Like we said before, banks and other lenders will make a decision on lending money to you based on risk and affordability. If they decide that there is a high risk that you will struggle to make repayments on time or as agreed, they are more likely to say ‘no’.

There is a large range of lenders in the market who offer lending options for different customer groups, including those with poor or lower credit. But, having a good credit score means you’ll have access to more options and access to better deals and lower interest rates.

Financial Contracts

Your credit can affect your ability to take out other forms of credit as well. For example, phone contracts, financed cars and even household bills paid via direct debit. If you do not have a good track record of paying for things on time, it is less likely that these types of companies will see you as a reliable or trustworthy customer.

The same principle goes for renting and applying for a mortgage. A mortgage lender will not want to lend you hundreds of thousands of pounds if they see you as a risk. A landlord is unlikely to want you as a tenant if you have a bad track record when it comes to repayments.

Employment

Some companies will do a credit check on you before agreeing to employ you. In the same way that a company might ask your old employer for a reference, this is another way for them to confirm that you will be a reliable employee, and not vulnerable to bribery or other dishonest behaviour. For example, if you apply for a job in financial services, or a high-security role and you have a poor credit history, the employer may see you as a risk to the security of the company. In the police and HM Forces, having poor credit may be a barrier to certain jobs or promotion.

However, it’s worth noting that no employer can do a credit check without your permission, and these checks should be stated within your contract.

Keeping track of your credit

Knowing is always better than not knowing. You can easily track your credit score with free apps and websites. Some of the most commonly used ones are ClearScore, Credit Karma and Equifax. These apps also tend to offer other services, like helping you to find credit options you might be accepted for.

Myth: ‘regularly checking my credit report will negatively affect my credit score…’ This statement is wrong. When you check your credit score through these apps, they perform a soft search. A soft search won’t affect your credit score, and isn’t shown on your credit file. We would encourage you to check your credit file regularly to make sure all the information is correct and up to date.

What can negatively affect my credit?

When you apply for credit or for a loan, some lenders will do a ‘hard’ search on your credit report. This type of check on your credit record is visible to other lenders, who will be able to see that you have applied for credit elsewhere. Applying for multiple loans or credit over a short period of time will hurt your credit, as some lenders will see this as an indication that you are desperate or in financial difficulty.

Other things that can negatively impact your credit score are:

• Being late with or missing repayments
• Having multiple accounts open with different addresses
• Going over your agreed credit limit or overdraft
• Having low credit limits compared to your income
• Regularly using a large percentage of your credit limits

Ways to improve your credit

• Paying your rent, bills, repayments, contracts, etc on time
• If you think you’re in financial difficulty and may not be able to keep up with your payments, tell your lender ASAP
• Check your credit report regularly for mistakes
• If you’ve been rejected for a loan or credit facility, wait a few weeks or months until you apply again
• Keep your address up to date on the electoral roll and across all of your accounts
• Prove you’re reliable by taking out a small loan or a credit card that is easily repayable