When it pays to know the score

APOOR credit score can wreak havoc on your life but shockingly, few people understand what their file contains, who can view it and how the data affects their life. It can seem a little like Big Brother as it follows you around through life and determines whether you can borrow money, finance a business, or even secure a new job.

Life is harder if you have a poor credit history, and any damage can take years to put right.

Some claim the major credit reference agencies are failing consumers and causing financial harm to millions by unfairly barring them from affordable credit.

If you have had past financial problems or plan to borrow money, you need to know the score.

NO CREDIT

Your credit report is a personal history of all the credit you have taken out, including mortgages, credit cards, bank accounts, HP payments and even mobile phone contracts.

It will show how much you owe, whether you meet your regular payments, if you have applied for credit recently, and whether you are bankrupt or have any County Court Judgments (CCJS) to your name.

The data is held by three main agencies, Experian, Equifax and Transunion, and when you apply for credit, lenders check it against their own records and lending criteria, before deciding what to offer you.

If you are squeaky clean then you can take out a mortgage, credit card or personal loan cheaply and easily, but if you have had financial troubles in the past six years, these will show up and you could pay more to borrow money, or be rejected altogether.

Ironically, people who have no borrowings may have a poor credit score, as agencies lack information to build up a picture of their finances.

HACKED OFF

A new campaign claims that the three major credit reference agencies are failing consumers and causing financial harm to millions of hardworking people by unfairly barring them from affordable credit.

Entrepreneur Alan Campbell, who spearheaded the Debt Hacker campaign against payday lenders, said the system traps millions in debt and excludes them from affordable credit.

This has driven them to payday loan companies such as Amigo and Quickquid, both of which have now collapsed. More than three million Britons took out payday loans in 2018, paying an average APR of up to 1,250 per cent.

Campbell has founded a new ethical lender called Salad Money, to help those excluded by credit decisions based on “arbitrary metrics, such as moving house too often, failing to register to vote, or being refused on a loan application”.

Others have a damaged credit record due to incomplete or inaccurate data, recently moving back to the country, never having a credit card before, or being in a relationship but without managing the finances. Campbell said credit reference data can punish people who miss loan or bill payments for unavoidable reasons, such as long-term sickness or a bereavement: “It may have little bearing on their current ability to repay a loan.”

Salad is offering a new model of lending that Campbell claims can lift millions out of the credit trap, as does another organisation called Fairquid, but you can also take steps to clean up your own credit report.

CLEAN IT UP

James Jones, head of consumer affairs at Experian, admitted that many face a challenge building up their credit history, particularly those moving from overseas or with little financial track record: “This is why we continue to introduce new sources of financial data, such as rent payments, to help people more easily build a credit history.”

Some 1.2 million social housing tenants have their rent payments recognised for the first time, with eight out of 10 expected to see improved scores.

To improve yours, use the forthcoming election to check you are on the electoral roll, as this helps lenders verify your name and address. Jones said: “Open a current account, which provided you manage it responsibly, will support future credit score calculations.”

Setting up a mobile phone contract could help build your track record, so can putting your name on utility bills.

Avoid applying for several new accounts or forms of credit in a short time, as this may raise concerns that you have money problems.

‘It is good practice to raise your credit score before applying for a loan’

TAKE CARE

Less than one in five people know their credit score, according to research by Moneyguru.com.

The site’s personal finance expert Deborahvickers advises having a thorough clean-out of your finances, paying off as much existing debt as possible and closing down unused credit cards. “It is good practice to raise your credit score before applying for a loan,” she added.

You can check your credit report for free from the main three agencies, and should dispute any errors.

If you have missed payments for a good reason such as illness, divorce, bereavement or redundancy, you can explain this by sending the agencies a 200-word notice of correction.