It is a common misconception that every consumer has a universal credit score that banks and lenders consult when deciding whether to offer you one of their products.
The truth is that each application for credit is assessed individually by the lender using a set of criteria that is different for every institution. Being rejected by one company does not necessarily mean that you will be rejected by others, and there is no such thing as a credit 'blacklist'.
If you are planning to apply for a credit card, loan, mortgage or some other form of financing in the near future, it is important to understand how your credit rating works and how you can improve it.
Why is my credit score important?
Your credit score - or the score you are likely to receive when banks are deciding whether to lend to you - is hugely significant because it has an impact on what could be very important steps in your life, such as taking out a mortgage or getting a loan for a big purchase.
As well as guiding a lender's decision to accept or reject your application, your credit rating could determine factors such as how much you are allowed to borrow and how much interest you pay.
A borrower who achieves a high credit score and is consequently deemed low risk is much more likely to be offered a higher amount and a more attractive rate.
What impacts my credit score?
While every lender is different in its approach to scoring credit applications, there are some universal factors that will impact your likelihood of being accepted, ranging from minor details to major problems.
One thing that is likely to set alarm bells ringing for lenders is if you already have a lot of outstanding debt. If you are in the process of trying to pay off existing loans or credit cards, a bank could well decide that you do not have the financial capacity to borrow more.
Credit providers will also look at how well you have kept to previous repayment plans. Any missed or late payments on everything from mortgages and personal loans to gas and electricity bills will remain on your record for six years.
Would-be borrowers should also avoid making lots of applications in a short space of time, as this suggests you are desperate to obtain credit and might be in some financial difficulty.
There are some major factors that are likely to result in instant rejection from most lenders, such as county court judgements for an unpaid bill, which will stay on your file for six years.
Your score is also likely to be affected if you have lots of open credit card accounts that you never use, if you have changed address regularly, or if you are financially associated - through a joint bank account, for example - with someone who has a poor credit history.
How can I improve my credit score?
The good news is that there are many ways to improve your credit score. Start with some basic steps, one of the first of which should be to check your credit report.
You have a legal right to see your file for £2, something you can do online with Equifax, Experian or Callcredit. Experian and Equifax offer three 30-day trials of their credit report service, but you will be charged if you forget to cancel before the end of the first month.
If you spot any mistakes on your file, contact the lender the error relates to, or get in touch with the credit reference agency to raise your concerns. You are entitled to add a 'notice of correction' to your report explaining your side of any matters that could have an impact on your credit rating.
Another basic necessity is getting yourself on the electoral register, as lenders use this information to verify your identity. If you are unsure about whether you are on the register, check with your local council.
You should also cancel unused credit cards and ensure that basic personal details, such as your address and phone number, are consistent across any accounts and financial products in your name.
Consumers taking a long-term view to improving their credit rating can ensure they keep to repayment plans for any existing products and pay off outstanding debts as promptly as possible.
It is also possible to take out credit or prepaid cards specifically designed to improve your credit score, although these will charge fees and potentially high rates of interest.
One route that should absolutely be avoided is using a credit repair company, as these firms charge you for completing tasks that you can do yourself for free.
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