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Credit history, credit score, and credit report – what’s the difference?

Posted 18 April 2016

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Are you struggling to get to grips with what lenders look for when you apply for credit? We explain all in our latest blog.

You’ll be no stranger to terms like ‘credit score’, ‘credit rating’, ‘credit report’ and ‘credit history’ if you’ve got problem debts. You’ll also know that your difficulties with managing your borrowing can have an effect on these.

However, there’s a lot of confusion surrounding credit histories and many myths too. In this blog, we’ll tell you what you need to know about your credit history – and clear up a few of those myths.

 

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Lenders aren’t all looking for the same thing

Every lender has their own guidelines for assessing borrowers and deciding whether to accept or decline an application for credit – it all depends on the products they’re offering, the deals they’re running at the time and whether or not they specialise in a particular type of customer. Because lenders aren’t all working from the same set of criteria, if your application for credit is turned down by one it doesn’t mean it will be turned down by them all.

Having said that, there are some things that all lenders want to see. The first of these is that your details appear on the Electoral Roll, which you can register for here if you aren’t already on it. Lenders use this to check that the person applying for credit is who they say they are.

Another thing most lenders will look at is your earnings. By seeing how much you earn, they can get an idea of how much you can afford to repay each month. 

Lenders will also want to look at your outgoings – by comparing the money you’ve got coming in with what you’ve got going out they’ll be able to assess if you can afford to repay the credit you’ve applied for. For example, if you apply for a mortgage your lenders will thoroughly examine your finances so that they can get a good idea of how much money you have leftover for your repayments once all your other outgoings are taken into account.

And finally, lenders will take a look at your credit history when considering your application. But what exactly are they looking for? And do you have a credit score that lenders are given to help them decide?

No such thing as a universal credit score

First, let’s clear up this common mistake. There’s no such thing as a universal credit score. Really! If you have never missed a payment, it’s not as straightforward as being given a perfect 10 by all the banks.

But if there is no credit score against your name, how do lenders make their minds up about whether to approve your application? Well, the first thing they’ll do is look at your credit history through one of the credit reference agencies – Experian, CallCredit and Equifax. Your credit history is a record of all the lines of credit you have available to you – even if you’re not currently using them – and how you have managed them over the last six years.

If you miss a payment towards a credit card bill, for example, this will show up on your credit history. Entering into a debt solution will also be recorded here. And if you always pay off your credit card balance in full each month that will be shown too. Together, all this information creates a picture of you as a borrower. It’s this that helps lenders decide whether or not to approve your application and, if they do, how much they should lend you and at what rate.

So, if a lender can see that you have a couple of lines of credit open to you – perhaps a credit card and a store card – and that, although you regularly spend on them, you repay the balances on time and in full, they are likely to view you as a responsible borrower. If, on the other hand, they can see that you regularly miss your repayments, they may worry that you’re struggling to manage the credit you have and lending you any more could stretch you too far. And if a lender sees you’re on a debt solution they will know that you have struggled with managing your borrowing in the past.

How much credit do you have?

It’s not only how well you manage your credit that influences the lender’s decision but also how much you have available to you. If a lender can see that you have several credit cards and store cards, an overdraft, a personal loan and a mortgage, it’s not unreasonable to conclude that you’ve already got enough credit to stay on top of without lending you anymore. That’s why it’s a good idea to close any accounts you don’t use (providing the balance is clear) before you apply for more credit.

Another thing lenders will take into account when they look at your credit history is how many applications for credit you’ve made. If they can see that as well as applying to them you’ve applied for credit cards or loans with several other lenders in the space of a few weeks, they may decide that you’re desperate to borrow – and this will make them think twice about lending to you.

What’s the difference between credit history, score and report?

So now you have an idea of what lenders are looking for when you apply for credit, let’s finally clear up what the difference is between a credit history, report and score.

As we mentioned, your credit history is the record of your borrowing over the past six years, which lenders can access through a credit reference agency. You can access it too by signing up to one of the agencies, and it’s a good thing to do as you can make sure all of the information on there is up-to-date and correct.

Each of the credit reference agencies can provide you with your own credit report.  This is a breakdown of your personal details, credit accounts, repayments and all the other information contained within your credit history. They often illustrate this with a single number that they describe as a “credit rating” or a “credit score”.  Each of the agencies calculates this in a different way – they are just an illustration of the overall health of your credit history and the numbers aren’t shared with lenders.

Finally, when you apply for credit the lender you’ve applied to will calculate their own credit score for you.  There’s no universal credit score; each lender will calculate its own based on the information you’ve put on your application form, your credit history and the lender’s own criteria.  

 

We hope this blog has answered any questions you may have had about your credit history. And if you’re worried that missing payments towards your unsecured debts will have taken its toll on your credit history, you can get in touch and chat to one of our debt advisors using any of the options on the left.

 

 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.