Understanding Your Credit Report

A credit report is a historical record of your financial activity compiled by credit reference agencies. It reflects how you manage and repay debt, acting as a financial CV for lenders and other firms to look at before doing business with you. A credit report contains a record of how and when you pay your bills, how much debt you have and how long you've had credit accounts. It also shows your current and previous addresses and any financial associations you have, for example, if you share a joint account with someone.

When you apply for any type of credit, such as a mobile phone contract, credit card, mortgage or overdraft, companies will look at your credit report to see how much credit you've previously had and how you've managed the repayments. The lender will use this information to help them decide whether you'll be likely to repay any credit they give you. They'll look at the following:

• How much debt do you have
• Whether you generally pay your debts on time
• How much credit you’ve taken out in a short space of time
• How much credit is available to you

Even if you’ve never borrowed money or used a credit card, you’ll still have a credit report but it just may not have much information on it. Actions like paying your phone bill and being on the electoral register will all appear on your credit report.

You'll have a credit report if you’re 18 or older and have taken out any credit agreement such as an overdraft, mobile phone contract or mortgage. It's a good idea to regularly check your credit report, ideally once a year at the very least, before applying for credit. Checking your credit lets you spot any mistakes that could affect your ability to get approved for credit or access the best credit deals. Even seemingly small mistakes can seriously affect you. You'll also be able to identify if there's any fraudulent activity, such as credit applications made in your name by someone else.

As your information can be slightly different across the 3 credit reference agencies, it's a good idea to check all 3. You won't be penalised for checking your report and there's no limit to the number of times you can do so.

If you identify a mistake on one or more of your credit reports, you must rectify it as soon as possible. Not doing so could have serious implications on your ability to get credit in the future. Contact the credit reference agency or the company that provided the information directly to correct it. They’ll then contact the lender to verify the information, but it can be quicker to contact the lender yourself. The credit reference agency must amend or remove the entry or take no action within 28 days of your request. The lender must approve the removal of an error from your credit report. If they don't, you'll have to add a "notice of correction" to your file explaining in 200 words why there’s an error.

While your credit report is a summary of your credit history, your credit score is a 3 digit number, usually between 300 and 999, that reflects your overall credit risk. It provides a quick at-a-glance summary of your overall credit risk. The higher the credit score, the more likely you’re to have a good history of using credit responsibly.

If you have a lower credit score, it can suggest to prospective lenders that you need to improve your financial behaviours before taking out more credit. Scoring models are used to calculate scores that consider your credit report information, such as the amount of debt you have, your payment history and how long you've been managing credit. There's no single credit score system in the UK, as each credit reference agency uses its own scoring method so it's a good idea to check all 3.

As each credit reference agency has its own scoring system, here's what the 3 main credit reference agencies consider a good credit score:

• Equifax: 420 to 465
• Experian: 881 to 960
• TransUnion: 604 to 627

To access the best possible mortgage rates available, it's a good idea to try to boost your credit score up to the excellent category across all the agencies:

• Equifax: 466 to 700
• Experian: 961 to 999
• TransUnion: 628 to 710

There's no precise credit score needed to be eligible for a mortgage. Lenders consider several factors beyond a credit score. However, the higher the credit score, the better your chance of securing a mortgage offer and a favourable rate. If your credit score is below what's considered good across the different agencies, work on improving this before trying to get a mortgage.

If you have no credit history, lenders don't have a view on how you manage credit, meet your repayments on time, how much credit you have or check your identity. This can make lenders more reluctant to lend to you. In this case, a specialist lender can help, who will consider your mortgage application on its own merits. In this case, your financial circumstances, including employment history, income, savings and investments, will be more closely examined.

By getting to know your credit report and score, you'll have a good understanding of your financial position and how potential lenders perceive you. If your credit report shows that you have a low credit score, work on improving it with our handy tips.

If you're concerned about the impact of your credit history on your mortgage application or just would like some specialist mortgage advice, our team at John Charcol will be happy to help. Contact us on 0330 433 2927 or submit an online enquiry.