Have you borrowed money or taken out a new financial product for your business or yourself recently? Have you thought about the implications of these actions on your credit file?
Your ability to borrow money from banks for property is heavily dependent on your credit file so it’s worth making sure you keep an eye on yours to avoid finding yourself faced with a great property deal that you can’t get finance for.
Who produces credit files?
Credit files, or credit reports, are produced by credit reference agencies and are used to produce a credit score that essentially measures your creditworthiness to lenders.
There are three large credit reference agencies (CRAs) in the UK. These are Experian, Equifax and Callcredit. In theory, each of these agencies should hold the same information about your credit history and commitments, as well as details of any searches carried out on your file. In practice, each of these agencies will hold slightly different information about you, both as an individual and/or as a businesses, depending on their agreements with their data suppliers.
It’s a good idea to check your files from time to time to make sure everything is correct — MoneySavingExpert has a guide that outlines the cheapest ways to do this.
You should also always check your files if you are declined for credit in case there are errors on your file or you’ve been the victim of fraud.
What’s my credit score?
As well as holding information about your credit, each CRA also provides a credit score for you but crucially, each agency’s report is based on its own scoring system which looks at what it deems to be desirable traits on your reports — the key point here is that what they produce is what they deem desirable.
Credit scores can provide an indication on how you are likely to be viewed by lenders, but that’s all they provide — a good credit score is no guarantee you’ll be accepted for a loan.
It is not up to a CRA to decide on your eligibility for a product provided by a lender, but on the actual lender you are dealing with.
If you apply for a buy-to-let mortgage but get declined, this is due to the lender’s own set of criteria that you haven’t met. As lenders do not commonly share details of their criteria, they may refer you to the CRA they use if you are rejected but you can also ask the lender to provide the reason.
Tips to improve your credit score…
Many different actions can have ramifications on your report, some good, and some not so good and again, these are viewed differently by different lenders. However, below are some general tips to help improve your score:
1. Make sure you’re on the electoral roll. If you don’t want to receive unsolicited mail you can choose to opt out of being on the open register and your details will still be searchable for credit application purposes. Many companies will view applicants not being on the electoral roll as a negative and some won’t lend to you at all if you’re not on it. In addition, if you are eligible to vote but are not registered you can be fined.
2. Check your report(s) regularly. This goes for both your personal and business records. If you see something that is incorrect, contact the relevant CRA to have it amended. Always check your reports if you’re rejected for credit in case there’s something on there that isn’t right.
3. Cancel any cards you no longer use. If you’ve credit cards you haven’t used in years, cancel them. Available credit can sometimes work against you, even if it isn’t being used.
4. Make sure any cards you don’t use often are registered to your current address. Old addresses that haven’t been updated can cause problems.
5. Avoid applying for too many financial products at once. Lenders are able to see searches on your credit file and tend to take a dim view of lots of credit applications being carried out in a short space of time.
6. Pay for insurance policies upfront if you can. Buying insurance for your properties and paying for the full year won’t usually leave a credit search; paying in monthly instalments involves a credit agreement so it will.
7. Get your business in order. The annual return required by Companies House, now known as the confirmation statement, is like the electoral roll for companies. If you have an active confirmation statement, this may not have a positive impact on your credit, but it won’t be a negative. If it’s missing or not up-to-date, this can be viewed poorly by lenders.
Not all credit searches count
Many people avoid applying for credit because they know that applications are recorded as searches on your file and too many will count against you. This is only partly true. There are actually two different types of search that can be conducted against an individual or company.
One is a recorded search – too many of these may have a negative impact as these are generally used where you have applied for something. It’s worth noting that in most cases an approval in principle for a mortgage will be a recorded search, so it’s best not to get too many. Some banks do only soft searches when providing an approval in principle, but these are rare and you should always ask what type of search will be carried out before agreeing to one.
The other type is an unrecorded search; you may also know it as a ‘soft search’. This is where you have enquired, but not actually tried to apply for something, e.g. obtained an insurance quotation. Unrecorded searches will usually only be visible to you and the company that conducted it.
Credit myths busted…
- Previous residents or tenants of your address do not have any impact on your report. However, linked people — such as spouses or others you hold joint credit agreements with — will appear on your files and can affect your ability to obtain credit.
- There is no such thing as a ‘credit blacklist’ but there is a fraud blacklist that can seriously impact your ability to get credit if you find yourself on it. National Hunter, often referred to in the property industry as the ‘Hunter List’, is a fraud database that has had a big impact in particular on property investors, as lenders have become increasingly concerned about fraud related to buy-to-let mortgages. If you’re being declined for credit and there’s nothing untoward on your CRA reports, it might be worth checking with National Hunter.
- Items on your credit report do not stay there forever. For example, a county court judgment will stay for six years from the date of issue, but a search by a credit provider for only one year with Equifax and Experian and two years for Callcredit. So if you’re declined after an application spree, you won’t have to wait too long for the searches to disappear.
- You can check your credit report through a CRA as many times as you like without affecting your score or your report.
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