On an April 2016 episode of his HBO show Last Week Tonight, British expat John Oliver lambasted the three major US credit bureaus. He groused that the reports they issue can be rife with errors, which is particularly bothersome because these days credit scores are used for a wide variety of purposes beyond qualifying a person for a loan. In effect credit reports are often used to judge someone’s trustworthiness and overall character, the folly of which Oliver pointed out, citing a report from the Consumer Financial Protection Bureau which showed that more than half of all debt on credit reports in the country stemmed from medical bills.
Here in the UK we may not have the crisis with medical debt that so many of our friends across the pond are experiencing, but millions of us can empathise with some of the other problems Mr. Oliver cited. The major UK credit reporting agencies, Callcredit, Equifax and Experian, exert a broad influence on our lives, and as a result, consumers face many of the same woes that US consumers have experienced. Our credit reports not only influence the terms we get when we apply for a personal loan, auto loan or mortgage, but increasingly they are also used by insurance providers, utility companies and prospective employers and landlords. Credit reference agencies keep a lot of information about our borrowing and financial behaviour and many other aspects of our lives.
What does your credit score really mean?
For all the attention credit reports get, you would think that they are the Holy Grail upon which lenders solely rely when making their decisions as to a person’s credit-worthiness. While your credit score is a factor that lenders use, it is only one of several factors, and actually carries less weight than the companies who make their money with the scores would like you to believe. Typically, a lender will rely upon three criteria in evaluating an individual’s creditworthiness.
1. Your credit application – You, rather than the credit report, provide information about your current finances, including your place of employment and income, any outstanding debts you still have, and the expenses you must meet every month. With this information alone, the creditor can determine whether you can afford to make the required payments.
2. Your history with them – While the days of the friendly banker who approves loans without qualification to a previous lender are long since over, a lender will definitely consider its previous dealings with a customer when making its decision to extend credit.
3. Your credit reference files – These are the raw data upon which your credit score is determined by the reporting agencies. The files may contain information that explains any delinquencies in making payments or information about communications the lender has had with creditors.
Your credit score is really a number on a fairly arbitrary scale, with each credit agency establishing their own unique scale and scoring criteria. As a result, you might have a difficult time reconciling the results of the different reports, were you to study them side-by-side. Furthermore, the agencies depend upon creditors to provide accurate and timely updates on individuals’ information, an effort which many individuals have found lacking. Since prospective creditors have little choice but to take the information on the credit reports at face value, the onus for ensuring the accuracy of those reports falls on the individual, who actually has to pay to access even a part of the information that creditors see.
But one big problem is that, just as it is with the US credit bureaus derided by John Oliver, UK credit reporting is similarly imperfect and there are likely to be errors in your report. And even if there aren’t any errors, there’s still the matter of your rating. A bad credit rating can seriously affect many areas of your life.
There may be any number of reasons for a bad credit rating. Obviously, failing to live up to the terms of the loan is chief among the reasons that your credit rating gets lowered. Being declared bankrupt is another red flag to creditors, as is having a County Court Judgment (CCJ) filed against you, or even entering into an Individual Voluntary Arrangement (IVA). A pattern of making only the minimum payment on one or more credit accounts is generally viewed by prospective creditors as a sign that an individual is having difficulty keeping up with the expenses they already have, which is not conducive to a new creditor to approve the application.
Ironically, even the responsible approach to handling your finances can have a negative impact on your credit rating. If you pay all your bills on time and pay cash for even major items such as cars and household appliances, the fact that you have no debt can actually make you appear less creditworthy to lenders.
Keep yourself informed
Now more than ever it is important for you to check your credit report on a regular basis. If you’re still not clear on the reasons that you need to do so, or if you need instructions about how to do it, you can find them on our guide to checking your credit report online for free. We provide step-by-step instructions and give you the pros and cons of the for-pay services offered by the agencies.
If there are errors on your credit report you can take steps to get them corrected. If your credit rating is not as high as you’d like it to be, you can begin taking steps to improving your standing. But you can’t do any of this effectively without first knowing what those omnipotent credit agencies are saying about you.
A credit report is not the sum total of a person and it doesn’t tell the entire story of your life. But it’s up to you to make sure that the story it does tell is as truthful as possible.