How much is credit costing you?
With the current economic climate continuing to squeeze people’s finances, the amount of spending on credit is increasing. Spending on plastic alone is escalating; although the UK Cards association shows levels are down on 2010, the end of 2012 saw an upturn of spending on both credit and debit cards, with retail purchases leading the way, with 857 million transactions made amounting to 21.3 billion pounds in November alone.
All thrifty people know that it’s a wise idea to shop around in order to secure the best possible deals on things like insurance, mortgages and fuel suppliers. However often people are unaware they are getting the best terms for credit on loan facilities extended to them by their bank or card suppliers.
The terms that are offered by any creditor depend largely on an individual’s credit score. Although we would all love to have a card or mortgage with a low interest rate, these are only offered to those who present the lowest risk to the creditor in terms of repayment. This low interest rate is also only used for forms of credit where the total sum borrowed is quite large, thus ensuring that the creditor makes a profit on lower percentage rate deals.
What’s in a score?
There are three major agencies in the UK which compile and store a credit record which banks and lenders will access when they run a credit check. The scores are rated differently, and different loan providers will each have their preferences as to which agency they use for their checking services.
You can (and should) obtain a copy of your basic report from the agencies. They are legally obliged to provide this on written request and a nominal fee to cover postage and processing (usually about £2). Some documents will be required for ID checks so they can verify that you are the correct person to send the report to. Checking your own report in this way will not affect your credit rating at all.
The report will consist of your financial data and list any problems or “flags” on your record, such as missed payments or legal decisions against you in terms of credit repayment. You should review this data carefully as old or inaccurate information could be degrading your credit score or indicate that someone is using your identity to run up sums of debt in your name.
For a subscription fee, the agencies will provide a more detailed report that will include their actual score rating. If you know which agency is used for a particular form of credit you wish to apply for, your credit score should give you a good idea if you will be accepted.
Equifax uses and 0-900 scale with 0-299 being “very poor” and 475+ as “excellent”.
Experian uses a 0-999 scale with 0-560 being “very poor” and 961+ as “excellent”.
CallCredit uses a scale from 1-1500 and also has a five star rating for credit checks but is not as frequently used as the other two agencies in the UK.
Shopping around for credit
Obviously the lower rate you can get on credit loans (whatever the product) the less money this will cost you in repayments. However those with a “very poor” or “poor” rating will often struggle to be accepted when they apply for credit. Some lenders will refuse outright; others may accept but offer another product instead, which usually has a higher interest rate than the desired product. This is to offset the perceived risk in extending credit to someone with a poor record of debt and repayment.
Staying in a bad credit situation for an extended period will therefore be expensive and make it more difficult to gain better forms of credit. Furthermore each application for credit will temporarily lower a user’s credit score: often when people are declined they re-apply without taking the time to find out why. This is the worst thing to do as multiple applications and refusals in a short space of time will lower a score beyond any hope of acceptance.
Getting better credit
Fortunately there is a plan for recovering the situation. Firstly review your credit report and check for inaccurate information. In many cases, simple steps such as registering on the electoral register or correcting a flat address number may be all that it takes. Other issues may take more time to resolve, such as bankruptcies or CCJs which will lie “on file” for a number of years. Ensure that any debts that have been discharged are marked for deletion; you can even add annotations to explain why debts were incurred and any extenuating circumstances. The agency is obliged to update your credit file information once it has been checked.
You may have to put your ideas for a low-credit loan to one side for the moment. Prime credit candidates will usually not struggle to be accepted for credit; however. there are a number of specialised lenders that offer loans to people with lower credit, or those who have issues in their credit history. Typically the credit advances on these are much lower, and the interest rate much higher than “prime” products.
The good news is that by using a credit product, your rating will improve provided that you handle the credit offered in a responsible way. Making repayments on time, not exceeding the loan limit and paying off the balance each month (avoiding the interest payment) will establish a track record of responsible credit use which will be recorded by the agencies. As your use of credit improves, so will your score and your chance of acceptance for better terms on credit cards, car loans and mortgage products.
Some providers offer a quick check service that will “pre-qualify” your application to see if you are likely to be accepted or not. An offer will not be possible until a proper credit check is made, but providing relevant details such as income and existing loans should give you a useful idea if your application will succeed, minimising further credit score damage from rejected applications. One such service is offered by One Minute Response, operated by Vanquis Bank.