Credit rating

Credit ratings and scores can seem very complicated and often rather confusing; if you understand the basics you should hopefully be able to manage yours as effectively as possible.

So what is a credit rating?

A credit rating is a simple number which many lenders use to determine whether or not they will give a loan or credit to an individual. Credit ratings are used to determine applications for various things including loans, a mortgage, a credit card/store card or hire purchase of goods.

A credit rating can simply be understood as how financially attractive you are to a lender.

Why do you need a good credit rating?

You may not be aware that you have a credit rating until you try to access credit, say for the purchase of your first car.

Credit scoring can dictate what financial products you will be able to access and how good the ones you actually get are.

For example if you apply for a loan to buy a car, the loan may be advertised with a ‘Typical APR’, this interest rate may be very low, but if you have a poor credit rating you may not be offered such a good rate. You may still be accepted but offered a different product.

If rejected for credit it does not mean that another lender will do the same as scoring systems differ.

What affects credit ratings?

An individual’s credit rating is impacted by a number of factors, some of which are controllable, others of which are not. A credit rating has to be built up; if you have never received credit then you will have no history and subsequently no rating or score.

Whether you have a less than perfect credit rating or no credit rating at all, there are certain things you can do to improve your rating and therefore eligibility to access credit.

For practical information about how credit rating is calculated check out the Adding up to a lifetime Relationships section. This website has lots of interactive information about all the different financial things you'll have to deal with as you go through life.

What causes a weak credit rating?

• Your name isn’t on the electoral roll
• You have legal actions against you (for owing someone/organisation money)
• You are bankrupt
• You’ve missed payments on past credit, including student loans (pre1998)
• You have made a high number of credit applications in a short period of time
• You have never taken out a credit agreement before
• Wrong information on your credit history

How to strengthen your credit rating/score?

• Check your credit report at least once a year, two of the main credit agencies are Experian and Equifax – make sure that all the information is accurate and up-to-date.
• Ensure you are registered at the correct address for the electoral roll – this can be the biggest contributory factor to a credit rating/score.
• Pay any past debts off and ensure any legal action taken against you has been dealt with.
• Ensure that you pay agreed sums to existing accounts on time and in full.
• Resist the urge to apply for credit in a number of places- hold fire until it has started to build again.
• Borrow to build credit if you have no borrowing history; using the card/account wisely, without incurring charges or penalties.
• Cancel credit cards that you aren’t using or don’t anticipate using.
  

NOTE
Banks pick customers for their own good, not yours.

The scoring is about PROFIT not RISK. Lenders will assess an individual and see if they can make any money from them; meaning a lender will not wish to lend to someone who is highly unlikely to be able to make repayments however they may also reject someone who pays all their debts on time and within interest free periods.

Why?

Because a financial institution will not make any money from someone who pays off in full and incurs no interest.

You can take the steps outlined above to improve your chances of being able to access attractive credit options, unfortunately there are no guarantees.