What is a credit rating, what does it do, and how does it affect you? Here’s everything some useful information you need to know about credit ratings and your credit score.
What is a credit rating?
When deciding whether or not to lend money to individuals or companies, financial companies like banks must be able to assess whether or not you’re likely to pay back the loan in full. Credit ratings are the system used to determine this.
Your rating usually constitutes a single score, which is calculated by taking into account a wide range of personal information about your financial situation and credit history.
What does it mean if I have a ‘good’ credit rating?
Having a good credit rating means you are more likely to be offered a loan or mortgage, and having a poor credit rating makes you less likely to be offered a loan.
People or companies with a good credit score will also find that they can access loans, credit cards and mortgages with lower interest rates.
What types of credit rating are there?
Credit ratings broadly follow two main models; individual and corporate. Individuals have a personal credit rating and companies have a corporate credit rating that exists independently of the directors and management team – although it may be influenced by their individual credit ratings in some circumstances.
Both individual and corporate credit ratings can be either short-term or long-term. Short-term ratings assess the likelihood that a borrower will default on a payment within a year, while a long-term credit rating looks at the likelihood of default at any point after that.
Banks and financial institutions themselves are also subject to credit ratings, which assess their overall financial health. Even countries are given a credit score.
How long have credit rating agencies been around?
Credit ratings agencies have been around for just over a century. The aftermath of the Great Depression demonstrated how important it is for banks to assess the credibility of a candidate before lending them money.
Who measures my credit rating?
Your credit rating is independently compiled by one of a number of credit rating agencies. In the UK, these are Equifax, Experian and Callcredit. There is no single universal credit score, and each of these companies will likely score you slightly differently based on their criteria and algorithm.
Lenders themselves will take multiple criteria into account as well as your credit rating when assessing your eligibility and the credit rating itself may differ depending on which agency they use.
Nonetheless, lenders tend to judge based on similar criteria, and it is unlikely that your eligibility will differ largely from one application to another.
What information is included in my credit rating?
This is the information that your credit rating contains:
What is not included in my credit rating?
Here are some of the things that credit rating reports do not know about you:
How can I check my credit rating?
There are multiple ways to check your credit rating. First of all however, you must make sure that you’re on the electoral roll. If you’re not, there’s a good chance that the credit agencies won’t have enough information on your personal identity to be able to establish a reputable credit report.
You are able to view your credit rating from any of the three providers, Experian, Equifax and Callcredit, and this right is enshrined in law. You can usually buy a comprehensive credit report from these companies for as little as £2.
Other credit reference agencies will compile, organise and adapt this information, giving you a clearer idea of how to interpret this information, and therefore how to improve on it. They may charge more for this service.
How do I improve my credit rating?
There are a number of ways that an individual can improve their credit rating. These steps are by no means a guarantee of improving your credit rating or being confirmed for a loan or mortgage but they have been shown to help in some cases.
Here are a few factors that can have a positive impact on your credit score:
What does my credit score affect?
Your credit score will affect you in a number of financial areas:
Can I still get rejected by lenders if I have a good credit rating?
Having a good credit rating isn’t the only criteria lenders look at when you apply for a loan or a financial contract. Banks and other lenders take multiple criteria into account when considering whether or not to lend to you. Among the things they look at are your personal application and your salary, which aren’t included in your credit score.