Understand Your Credit Rating

Understand Your Credit Rating

April 12, 2016

Understand Your Credit Rating – 6 Ways Lenders Calculate Your Credit Rating

When a lender looks at loaning someone money, they have to weigh them up to determine whether or not they should agree to the loan using a range of information. All lenders will use the same sources to gather this information but the rating you receive from different providers may vary, so it can be quite confusing to work out just how your credit rating is created. We’ve outlined some aspects of how your credit rating is calculated to de-mystify the process and help you to improve your chances of getting a mortgage!

  • Your credit score – Companies like Experian, Equifax and Callcredit collate information from many different sources to provide a “credit score” from an individual’s financial history. This information is then passed on to lenders to help them decide which credit applications to approve and which to decline. Since your credit score is generated from your financial history there is no record of your current salary or employment, and many of the important factors that lenders base their decisions on won’t be present. This means that although your credit score can be a useful indicator of your overall creditworthiness, it’s only one factor amongst many when it comes to your credit rating. Some companies will offer to sell credit score information to you, but you can use Money Saving Expert’s eligibility calculator to test your credit score for free!
  • Your lender – Though all lenders look for the same basic qualities, some will prioritise different types of customers over others. Even with a pristine credit history you may not meet a lender’s individual criteria, so don’t be put off if you’re declined for an application; you may still be successful with another provider!
  • Your credit history – Lenders want to know whether you’re likely to be a risky investment or not, and they’ll use your credit history to predict your future behaviour. The more information the lender has available, the more confident they can be with their predictions, but if you have little or no credit history they won’t feel comfortable taking the decision to loan you money. If you’re thinking of taking out a mortgage or a loan in the future, try to build up a good credit history by demonstrating responsible spending and good use of credit.
  • Your recent behaviour – Your recent behaviour is weighed most heavily in your credit rating, so if you’re planning to take out a mortgage you should take great care to pay every bill on time in the 12 months leading up to your application; any missed payments in the past year will count heavily against you! Using direct debit payments to keep on top of bills is a good way to ensure you don’t rack up any late or missed payments.
  • Your other applications – Each credit application you make is recorded as part of your financial history, and your lender will infer information from the applications you make. For example, many applications for credit cards in a short period can suggest that you’re desperate for credit, something that most lenders dislike. Ensure as well that your information is consistent across all your applications; any mismatched info may flag your application to fraud-checking services like CIFAS or National Hunt and can lead to your application being declined!
  • Your stability – If you’re applying for a mortgage or a large loan, your lender will want to know that they can rely on you to pay in full and on time. Some indicators that they’ll look at are your savings and current account balances over the last 6 months, and if they’re reasonably stable this will count in your favour. Similarly, if you’ve been living in the same property for several years this will show greater stability than someone who moves often, and if you’ve been in the same job for a long time this will show a reliable, dependable income.