Your credit rating
Credit rating: What it means and how it works
When it comes to applying for a credit card or loan, your credit rating (also known as 'credit history' or 'credit scoring') will tell lenders everything they need to know about your finances – from what you've borrowed to how much you've paid back and when – all of which influences your application.
Here's what you need to know:
What is a credit rating?
Your bank, building society and other financial organisations will have a record of all of your transactions and payments from past to present, so lenders can predict how you spend. Each person's record is divvied up into 'black data' and 'white data' – 'black' records late payments or problems that may flag you up as a 'credit risk', while 'white' logs how you operate your account in general. Together they form your credit rating – the most influential piece of information for a credit lender.
What does a credit rating know about the customer?
A credit rating knows how many accounts and credit cards you have and how long you have been using them. From this it gains a good image of your payment history and whether you have paid your accounts on time. It knows if you have any court judgements or bankruptcies against your name, as public records are checked, and whether you are on the electoral roll. As of summer 2013, Experian, a leading credit reference agency, also includes rent payments on credit files - so paying your rent on time can also affect your ability to get credit.
How is it calculated?
Tesco Bank uses a credit reference agency that provides all of the information stated above (see 'What does a credit rating know about the customer?'). In order to reach your credit rating, these details are combined with Tesco Bank's tailor-made mathematical risk criteria formula.
How can you check your own credit score?
It is possible to check on the health of your credit history. Everyone has a right to view their credit files (known as your 'statutory credit file') under the Consumer Credit Act - and it costs just £2. This can be done online via three leading credit reference agencies, Experian, Equifax and Callcredit. Checking ahead of major credit applications could reduce your risk of rejection.
How can you improve your credit rating?
The easiest way to improve your credit rating is to spend wisely and make payments on time. It’s that simple. Successful credit card owners spend what they can afford: remember, a credit card is not 'free money' – you have to pay back what you spend! If you can afford to pay the full balance each month, rather than a minimum payment, you won't be charged interest on an outstanding balance and will gain a good credit rating. Setting a budget can be beneficial to avoid missing a payment, or paying late, both of which will damage your credit rating. The extra savvy credit card user includes interest in their monthly budget (rates can be found on bank statements) and keeps track of when their 0% interest period ends, after which any balance will be charged interest.