Most people today realise the importance of having and maintaining good credit. They also may have heard certain terms used in conjunction with credit and credit reports.
Terms like credit rating, or credit score are used a lot when someone is looking to borrow money from a bank or lender. However, many of us may not fully understand the terminology used, or what makes up our credit scores and how to improve them.
This comprehensive guide is to help remedy that.
With all the confusion and mystery surrounding credit reports, credit scores and credit scoring, we wanted to create a guide that explains your credit report and credit scoring, in simple, yet detailed terms.
If someone has experienced poor credit or had financial issues in the past, this guide will help them understand the steps they can take to improve their credit score.
Having a low or poor credit score can cost you thousands of pounds due to the fact you may receive a higher interest rate, which costs you more in the end.
Also, having a poor credit score could see your application for a much needed loan be denied.
The guide is set-up to be read from the beginning to the end in succession, beginning with credit reports and what components make up your credit report, to what is a credit score and what factors are used to come up with this magical number.
We will also guide you through ways to improve your credit score, and how to correct errors should there be any on your credit history.
For the course of this guide, credit report and credit history will be used synonymously. As will as credit bureaus, and credit reference agency or agencies.
We cannot discuss credit history and credit scoring without starting at the beginning, and showing a lineage of how it all, meaning credit reports, comes to be.
This is a simple, and I do mean simple, way to show how your credit history/report is created, and also your credit score.
a) You apply for a loan.
b) A bank or lender in their underwriting process, reviews your credit history and credit score.
c) Wait, you don't have a credit history yet, so one must be created. Much of the information you included on your loan application will be used to create a file on you. All that data is what is sent to the credit bureaus. They are the ones that actually create your credit report.
d) By the lender reviewing your credit history, or lack there of, a footprint or inquiry is made, showing the lender reviewed your credit report.
e) Information from the lender that they have reported, is then used by the credit bureaus (more on them in a moment) to create a credit report on you.
f) We will make the assumption your loan is approved, and you begin making payments.
g) The bank or lender then reports how you are paying the account to the credit bureaus on a regular (monthly) basis.
h) Using this payment history, as well as other information and data, a credit score is created.
Throughout the world in various countries, there are credit bureaus, or something similar that gathers data and information on borrowers and consumers, and makes a repository of this information available to banks and lenders to review. The banks, lenders, and in some instances insurance companies, use this information in making decisions as to if they will grant a loan, or insurance policy.
The process of deciding as to if a loan will be granted or denied is termed underwriting.
Credit bureaus themselves do not decide if a loan is approved or denied, they are merely providing the details and information they have gathered, and has been reported to them, on individuals, and sometimes companies, that is then reviewed by a lender or insurer, to make a decision regarding that individual's application.
Credit bureaus can also be known as "consumer reporting agencies".
It is important to know that everything on your credit history stays there for a period of six (6) years. After that time it is to drop off, if an account does not drop off after that period of time, you can request it be removed.
Here in the UK we have three (3) credit bureaus:
As mentioned, these credit bureaus do not grant or approve loans or provide insurance, they are simply the ones that gather the various information and details on people, and then allow access to this information to banks and lenders, and anyone you give permission to, such as some insurance companies and even some employers, if they use credit as a part of their hiring process.
Your credit report/history contains the following information and details about you:
A sample credit report can be viewed here.
Not just anyone can view your credit history, you have to give them permission to do so.
When you apply for a loan, in the application itself will be a notice advising you the lender may review your credit history as a part of making a decision on granting the loan. By completing the application, you are giving that consent to the lender to look at your credit history.
If an insurance company, or even a potential employer, use credit history as a part of the hiring process or underwriting an insurance policy, they must obtain your permission to review your credit report. Later on we will be discussing in more detail, other areas outside of lending where someone may want to review your credit history and credit score.
You can view your own credit report as well. All three credit bureaus will allow you a copy of your statutory credit report for a fee of £2. You can also obtain a free copy of your credit history at Clear Score.
Deciding how often to review your credit report can be determined in two ways, one is to just review it annually, or if you are very credit active, or have had any identity theft or accounts used in a fraudulent manner, you may wish to review your credit on a more regular basis.
The reasoning for reviewing your credit report is to ensure the information reported is accurate. Any errors could be costing you money by reducing your credit score.
So what can you do if there are any errors or omissions.
If you find an error on your credit report you have two ways to have this error corrected.
One way is to contact the creditor that is reporting the error directly. As they are the ones sending the erroneous information to the credit reporting agencies, and can make the change/correction at the source.
You can also contact the credit reporting agencies, Equifax, Experian, and Call Credit, and using their procedures, and providing the required documentation, have the error corrected.
The reporting agencies have 30 days to deal with your dispute and make the correction.
Omissions: Occasionally you may find that one of your accounts is not being reported on your credit history, or may only be reported on one of the credit bureaus. This can be due to the fact that the creditor in question that you have the account with, may not report accounts to the credit bureaus, or may report it to only one of the credit bureaus.
You can inquire directly with the creditor, but it is their choice as to which credit bureaus they may report to.
You may view an account on your credit report that you are unaware of, or you do not know the name of the lender reporting the account. Be aware that you may take out a loan with a company such as rent-to-own store, and the actual financing may be under a different name or bank.
Some of the terms we have used so far in our guide may not be known by everyone, so here we will try to list and define those terms:
Also named, Credit Reporting Agencies and Credit Reference Agencies. These are the agencies that gather information and details about yourself and anyone financially linked to you, to compile a report to show what accounts you have and how those accounts have been paid.
The process when a bank or lender reviews your details, credit history, and other information to make a determination as to granting or denying a loan.
Notice of Correction:
A Notice of Correction is a statement from you, with a maximum word count of 200 words, that you can use to explain something that may be on your credit history. You may wish to explain a rough financial period you went through, or to dispute an account.
Notice of Disassociation:
This notice can be used when you no longer have any financial association with someone or a third party. If someone at your address has gone bankrupt, or has poor credit and it is affecting you getting credit, you can use this notice.
Footprint or Inquiry:
Any time someone looks at your credit history a footprint or inquiry is placed there. This inquiry shows who looked at your credit, and the date. These inquiries stay on your credit history for a period of two years, and can affect your credit score. (More on this when we discuss credit scoring).
There are two types of footprints:
These inquiries are when a lender looks at your credit report. These types of inquiries can affect your credit score and stay on your credit history for two years.
Soft inquiries are when you may review your own credit report, or an employer may look at your credit, or some credit card companies may use these to create pre-approved lists. These inquiries do not affect your credit score.
Once a CCJ has been issued, a creditor can seek out an Enforcement Order allowing the use of Bailiffs, Charging Orders, and wage attachments, to collect a debt.
Now that you have a better understanding of credit bureaus and credit reports, you may ask yourself, how can someone, or a company, gather all this information about me, and all my details, and I have not given consent or permission for this?
According to the Data Protection Act of 1998, credit bureaus/credit reporting agencies don't need your consent as long as they have a "legitimate reason" for gathering the information and you have been informed they are going to do this.
As we discussed prior, when you complete an application for a loan or credit card, you are giving permission for that creditor to look at your credit report. If you refused to have any credit reporting agencies to have your details and information, there would be no credit report on you, and in return you probably would not be approved for any type of loan.
The short and quick answer here is yes, credit reporting agencies to some degree compile lists, and can sell information.
In most instances the details used are sold to other lenders who may target a group for pre-approved notices. A credit bureau may sell the details of a group of people who all have good credit scores, and the lender buying this list then knows they are good to target for some promotional campaign.
This is different than someone being able to actually view your credit report, again, they would need your permission to do so.
Next up, everything you could want to know about credit scores and credit scoring.