What your credit file and credit score really means

This may come as a surprise, but in real world terms to lenders, your credit score means very little.

Why? Because your ‘credit score’ is merely a number generated by Credit Reference agencies such as Experian, to show a very basic summary of your current financial position. Yes, this may be handy to you for an ‘at a glance’ view of your credit file, but this is NOT the same criteria used by lenders. They will have their own scoring system which we, as consumers, will never get to see.

Consider this - the three main credit agencies all use different scoring systems:

Experian rank their credit score from 0 to 999

Equifax rank their credit score from 0 to 600

CallCredit rank their credit score from 1 to 5

As you can see from the above, there is no right or wrong score in regard to what lenders see.

In short, it’s not your Credit Score which is most important, but your Credit Record. This is what lenders will assess when deciding whether to offer you credit and is what should be treated with the utmost care and importance.

Every time we take out credit with a lender, whether it is a store card, a hire purchase, a credit card or loan, this is registered on our Credit Record and the conduct on these accounts, along with other personal details, gives a much more in depth picture of how reputable and trustworthy we are as a potential borrower.

When we make an application, there are also additional things taken into consideration by the lender such as whether you are on the Electoral Roll, whether you have had missed or late payments now or in the past, what your overall indebtedness is (how much money you owe altogether) and whether you have a solid history of repayments.

Why doesn’t every lender treat me in the same way?

The short answer is that every lender has their own criteria to ascertain what makes a potentially good customer and their risk management is based on this.

Some companies are happy to take customers who have had an inconsistent financial history, but this may be reflected in the interest rates offered. Some companies have been known to outright refuse credit because of 1 single missed payment on a phone bill 4 years ago. There really is no set rule.

The most important thing is that you make repayments in full and on time. Stick to this simple rule and you will have the foundations of building (or re-building) a good credit history.

It is also important to get registered on the Electoral Roll and to also consider whether you are financially linked to anyone with a poor credit history. If you are linked by way of a joint account or mortgage, then that person’s poor score could have an adverse affect on your own.

Here are four top tips to ensure your credit record and score remain spotless: 

1. Keep credit card balances at least 30% below their limit – the trick is to pay down those balances and then keep them low. You could talk to your credit card provider about making several monthly payments if this helps you – little and often.

2. If you have lots of credit cards or loans with small balances on them consider paying them down or consolidating them into one loan. Credit scores will take into account how many cards/loans you have. 

3. Limit the amount of times you apply for credit in a year and if you are applying do so over a short period. Every time you apply for a loan, credit card etc. it causes a small reduction in your credit score that lasts a year, but this doesn’t usually kick in until 30 days after you have made the applications. The reason for this is that if you make multiple applications for credit it usually means you want to use more credit. This doesn’t apply to mortgages, car and student loans – you can apply for these as many times as you like and it won’t affect your score.

4. Pay those standard monthly bills on time every month – this is a big determiner of your credit score. If you’ve got savings and you can’t meet your monthly bills – use your savings.