You may have noticed that the importance of building and maintaining good credit has been a favourite theme on this site. That’s because we’re all about personal finance management, and poor credit is generally a sign that there’s room for improvement in your finances. We never cease to be amazed and dismayed by the large numbers of people who still aren’t on top of their credit reports. There’s really no excuse for that these days, because it is easier than ever to get this information. So at the risk of being redundant let’s take a closer look at the problem – and the solution.
Are most UK households in denial about their credit?
Most people know that a poor credit report can not only prevent you from getting a loan or a credit card when you need it, it can also stand in the way of getting a job, buying insurance, or even renting a house. That is why virtually all financial experts, including those who contribute here, stress the need to keep on top of your credit history to find and correct any mistakes and to take measures to improve your credit score. Unfortunately, most people – 53% according to a Which? survey of 1,000 households – have never even looked at their scores or obtained a copy of their reports.
Unfortunately, people’s lack of knowledge about their credit goes further than that, with 60% believing that it is the credit reporting agencies themselves – Experian, Equifax, and Callcredit – that make the final decisions as to whether loans will be approved. And 77% mistakenly believed in the existence of a uniform credit “black list” bearing the names of people whose loan applications were to be summarily rejected. With accurate information about credit scores so readily available, and in light of the fact that your credit history has such a significant impact on many aspects of your life, there is really no excuse for not keeping an eye on your score and correcting and improving it as required.
As Experian’s James Jones has said, “Understanding how to manage credit well needs to become an integral part of financial planning so we welcome…efforts to address some of the common misconceptions we still see every day.”
Are you sabotaging yourself without realising it?
Some of the misconceptions about credit stem from not understanding what lenders and others look for in your credit history. You could be doing things that compromise your credit without even being aware of it. These are not necessarily irresponsible actions, but they could still be a red flag for potential creditors. Even living a typical millennial lifestyle, for example, can leave you with a poor credit score. Paying cash for everything you buy doesn’t look good to those who are deciding whether you are a good credit risk, simply because there is nothing in your history that gives any indication of how you would handle credit. Also if, like many in the millennial age bracket, you have managed your money well enough to move to a better place every year or so, those moves will be more likely to tell lenders that you’re unsettled than to indicate your admirable financial management skills.
You aren’t alone in such misjudgments, however. A full 60% of British millennials make decisions that hurt their credit scores, most without having any idea that they’re doing so. Even failing to get on the electoral register can make you appear, on paper at least, to be less than settled, and it can lower your score. And if you’ve been late making even one payment in the last five years, your reliability will come into question and your score will be negatively impacted.
Jay Magee, RateSetter’s head of underwriting, has acknowledged that credit scoring is an “imperfect science”. Younger people are often penalised not just for making decisions that lower their scores, but also because — being relatively new to the financial world — they haven’t had enough time to establish a significant credit history or earn a good score. (We don’t mean to pick on millennials, by the way; there are people in all age groups who need to do a far better job of keeping up with their credit reports.)
Once you have checked your credit report and know your score, you can determine what you need to work on to make improvements. RateSetter’s Kevin Allen recommends a few easy steps you can take. Here are a couple, in addition to the items we’ve already discussed.
Apply for and get a free credit card, but don’t use it – If a lender sees that you’ve got a few credit cards, and that all of them are current, you’ll appear to be a good risk. If you do use a card, use it like you would a debit card and pay the full balance on time every month.
Open low-interest accounts and keep them current – Mobile phone accounts are great for this, since the payments you make on the “free” phone you got will look like well-handled loans to creditors.
As you become more aware of how creditors view you, you can adjust your actions accordingly, and you’ll be well on your way to building better credit.
The remedy for credit unawareness is easier than ever
Elsewhere on our website, we provide a good basic guide about the importance of your credit reports, the essential information about the various credit agencies, and direct links to check your credit online. Checking the report on agencies Callcredit, Equifax, and Experian won’t cost you anything, and you can get a more comprehensive statutory report for only £2. It is important to check all of the reports on a regular basis to make sure that all information is correct – not just basics such as your address, but information about the status of any credit accounts you have. Errors can and do show up on credit reports, and it’s up to you to make sure they’re corrected.
If you are divorced, for instance, make sure that your ex is no longer listed on any of your accounts, because that would tie his or her credit score to yours and possibly lower the score on the more credit-worthy of the two of you. If you discover any discrepancies, contact the reporting agency immediately and ask to have the information corrected.
Just as ignorance of the law is rarely a valid excuse when you commit an illegal act, ignorance about your credit report won’t help you when you apply for a loan, credit card, employment, tenancy or any number of other things that require a credit check. Arm yourself with knowledge before you go into a situation where your credit matters, so you won’t get any nasty shocks. And if your credit could stand improvement, make that improvement a priority as you go forward.