Credit scores form the bedrock of our financial lives. They control everything from whether you will be approved for a mortgage to the interest rate on your credit card – and even if you can take out a phone contract.
Yet an investigation by Wealth & Personal Finance reveals that credit scores are frequently riddled with mistakes and inconsistencies and are often poorly understood.
Their flaws could lead some people to be needlessly rejected for loans or pay higher interest rates, and others to be allowed to get into debt they cannot afford to repay.
Taking control: Credit scores are frequently riddled with mistakes and inconsistencies and are often poorly understood
Our findings come at a time when accurate credit scores are increasingly vital. As the cost of living bites, households cannot afford to have their incomes eroded by needlessly high interest payments.
Growing numbers of households are relying on debt just to make ends meet. Credit card borrowing soared to its highest monthly level since 2004 in November, the Bank of England revealed last week.
HOW THEY WORK…AND WHAT THE RATINGS MEAN
Three credit rating agencies gather information about every adult in the UK to help paint a picture of our finances and ability to manage debt.
These agencies – Equifax, Experian and TransUnion – collect data from banks about whether you have borrowed in the past and if you have ever missed payments.
They scan the electoral roll to see if you are registered to vote, find out your current and previous addresses and check if you are financially linked to anyone else. They also seek out information about whether you have been bankrupt or struggled with debts in the past.
Banks and other lenders then buy this information from the agencies and use it to help decide whether to grant individuals credit and what interest rate to offer them. The higher the credit score you have, the greater the likelihood you will be accepted for an affordable loan. It is therefore crucial that the information held by credit rating agencies is correct.
Yet, when Wealth & Personal Finance requested our credit reports, we found they varied considerably between agencies.
Sarah Davidson’s three credit rating reports ranged from ‘fair’ to ‘very good’. One agency had details about her credit cards, another had no record. One found four previous addresses for her; another found six.
One of Toby Walne’s credit reports said he had ‘three financial associates’. On further digging, he found that all three were his wife.
He received a perfect credit score of 1,000 out of 1,000 from one, so wondered why he was marked down to 999 by another. However, confusingly, each ratings agency uses a different scoring system, whether out of 999, 1,000 or 710. Worryingly, one report claimed that Toby’s home address had been removed from the electoral roll in September – news to him. Toby is planning to phone the council first thing tomorrow to investigate.
Rachel Rickard Straus’s credit rating varied from 877 to 970 out of 999, despite inputting identical information. One agency found five active accounts, another found seven.
Jeff Prestridge received a perfect score of 999 out of 999 from one credit rating agency. However, he was downgraded considerably to 755 out of 999 by another because it unearthed a mix-up on a single monthly mobile phone contract payment made many months ago.
A recent probe by the City regulator suggests the level of discrepancies we found is worryingly common.
The Financial Conduct Authority compared the credit information held by the three ratings agencies for tens of thousands of people picked at random. It found that between 35 and 57 per cent of individuals have ‘materially different’ credit scores depending on which agency is used. The regulator is currently probing the market over concerns that there is poor competition between rating agencies and that substandard credit information could be inadvertently damaging people’s credit scores.
CONTACTING A LENDER WON’T HURT YOUR SCORE
The FCA also found that a poor understanding of credit scores could be hurting people’s finances. For example, it found that 47 per cent of borrowers in financial difficulty are hesitant to engage with their lenders because they mistakenly believe contacting lenders could hurt their credit score.
It means struggling borrowers may be needlessly missing out on help and support to deal with their debts.
Sixteen per cent have ignored contact from lenders as a result of this misconception.
Furthermore, 43 per cent of consumers do not realise that everyone has a right to access their credit report for free.
There are several paid-for services – some as much as £15 a month – but a basic report detailing what information is held about you can be accessed without payment.
Dividend: The three big rating agencies gave the Wealth team varying credit scores
WHAT YOU CAN DO TO IMPROVE A RATING
The FCA has asked the credit score industry to set up a new representative body this year and has said they will work together to agree further improvements. However, all this could take months.
But there are things you can do to improve your credit score and make sure the information held about you is accurate.
1) Check yours every year. By law, all credit reference agencies have to provide you with a copy of your credit report for free.
You can choose to sign up for a paid-for service, but don’t be fooled into it if you would prefer a free version. The FCA says it has found evidence of ‘dark patterns and sludge practices’ by some agencies, which make it difficult for consumers to access their free report. Links to free reports are often hidden, while paid-for ones are advertised as ‘free’, when only the initial trial period is free, it says.
2) Make sure everything tallies. The most basic of inconsistencies can scupper your score, warns Justin Moy, of the mortgage broker EHF Mortgages. ‘Ensure all of your addresses for the last six years are correct and your finance statements and driving licence show your latest address too,’ he says. ‘We often see a low credit score when there are mismatches of information, for example if a bank account is registered at your old family home address.’
3) Keep your personal information up to date. If you change your address or name, make sure you tell everyone who needs to know. A parking fine notice sent to an old address and left unanswered can be all it takes to be slapped with a county court judgment, which can scupper your credit score.
4) Make sure that you are on the electoral roll. This is seen as a big plus on your credit score.
5) Get a credit card if you don’t already have one and can afford to. Lenders will often want to see that you have a good track record of taking out and paying back debt before they will extend larger sums, for example a mortgage. Before you apply, use one of the free online tools to check what cards you’re most likely to be accepted for so you don’t hurt your credit score by being turned down.
Go for a zero per cent purchase deal, which means you won’t be charged interest for a set period, and spend little and often. Pay off the balance in full every month without fail.
6) To get a good or excellent score, aim to have a couple of credit facilities where you don’t regularly borrow up to your limit, says Samuel Mather-Holgate, an independent financial adviser at Mather and Murray Financial. ‘Always make payments on time and don’t keep taking out credit and closing accounts,’ he adds.