What is Credit Scoring?
Credit scoring is performed by finance lenders to assess the risk of offering credit or loaning a sum of money to an individual or business. There are three major agencies that record information on us all; TransUnion, Equifax and Experian are the most recognised. Credit scoring takes the form of a numeric expression, with an individual’s credit score provided to finance lenders on request at a cost.
Why is Credit Scoring used?
Credit scoring is the main factor that determines whether to extend or deny credit. How old you are, house ownership and many other factors all combine to influence the eventual decision. A lower credit score means that it is a higher risk to enter into a contract with the borrower, however no individual has a universal credit score and this score will differ depending on which credit reference agency is used to calculate your credit score.
I’ve struggled to get finance in the past what should I do?
Most people know or have a good idea what their credit is like prior to making an application. Rather than waste your time and put unnecessary searches against you it’s always best to tell us before making an application. A quick discussion will allow us to ascertain if you are likely to get what we refer to as prime finance and the low rates we use to calculate offers on our website.
As a quick guide the following issues will make it less likely that we can obtain prime finance.
Any defaults or CCJ you think you might have.
Late payment or arrangement.
Bankruptcy or an IVA in the last 6 years. Any Debt consolidation arrangement.
More recent criminal record.
Multiply recent addresses or recent arrival to the UK.
I’ve been told I will get a lease deal even though I have bad credit.
I am sorry but this is simply not true. All funding methods require a credit search so if you have poor credit then, be it Lease Contract Hire or Hire Purchase, you can expect a few hurdles during the finance application.
I have poor credit, but it I am told this will not matter If I put the application in the business name.
If you’re a Sole Trader or Partnership the application begins and ends with you. Starting a Limited company won’t help as any new business will likely need a director’s guarantee, so you’ve guessed it, they will search you. A limited company won’t be able to stand on its own or have a good credit rating for at least 2 years and only then if the accounts are strong. It’s likely that a director’s guarantee will be required for several years after inception.
Limited Company and Director’s responsibility.
How can I improve my chances of getting credit?
Plan your credit application. If you know you will need to make an application for finance in the coming months, you should prepare for it, read this document and put as many steps in place to give yourself the best chance of success.
We have over 30 years experience selling vans to business and in that time, we’ve done thousands of credit applications. We will present your application correctly giving it the best chance of success. We have a far better understanding of what is required to underwrite a finance application and we often succeed where others have failed.
What may be required to support your credit application?
To get the application process started we only need a name, at least 3 years address history and a date of birth. However, if it’s not a simple application we will often ask you to produce the following:
3 months bank statements. This will show a snapshot of your cash flow and ability to pay.
Proof of address. This is often requested to prove that the applicant does live at the address stated on the application. It is often required if the applicant isn’t registered on the electoral roll or linked to other properties. A bank statement, mortgage, or rent agreement is commonly asked for but a utility bill or council tax letter will normally suffice.
Accounts or tax returns. If you are self-employed or in business, it’s often difficult to show that you’re able to afford the payments so we are often asked to supply proof of earnings – accounts and Tax returns are the simplest way to do so.
Minimum and Maximum Credit Scores
Amazingly, your chances of getting credit will differ depending on which agency provides your report. I would like to tell you why this is but it’s impossible to do so. It’s a fact that not all agencies pick up on all aspects of your credit history. They differ as some may focus more on business than individuals and there is no exact agreement as to how each agency score good or bad aspects of your credit. But I can assure you one application may meet with an approval with a lender where an identical application may fail with another. As an example, the maximum credit score for Equifax is 700, however its 850 for TransUnion and 999 for Experian. This outlines how complicated credit scoring really is, as there are no set guidelines to outline how each financial movement you make will affect your credit score and how many points to the positive and negative each transaction will impact your score.
It is helpful to understand what factors are considered when a credit score is determined, such as: Amount of credit owed, payment history, length of credit history, types of credit in use, new credit and recently opened accounts.
Possible reasons for Poor Credit Scores
Late or Missed Payments
35% of your credit score is based on payment history. How long accounts are past due and the number of items that are past due on your credit file will have an impact on your final credit score.
Using in excess of 80% of your Available Credit
30% of your credit score is centred on amounts owed, this takes into consideration the total number of accounts with balances remaining and the percentage of total credit limits that have been used.
Having a Limited Credit History
15% of your credit history is based on the length of credit history. Younger people will typically have lower credit scores than those who are older even when all other factors are the same due to the limited length of credit history.
Too Many New Lines of Credit Requested
10% of your overall credit score is based on new credit. Therefore, the number of recently opened accounts, the number of recent credit enquiries and the time since these new accounts or credit enquiries have been made will have an impact on your credit score. Individuals can however check their own credit scores without the risk of affecting their scores, whilst companies that inquire before sending promotional notices will also not have an impact on the score.
Only Using One Type of Credit
10% of your credit score is based on the types of credit that are used. It is beneficial to your credit score to have more than one type of credit on your file as it gives the indication that you are an experienced borrower.
Advice for improving and retaining a good Credit Score Rating
You may be unfortunate enough on occasions to find yourself being refused credit due to any of the reasons outlined above, however it is possible to rebuild your credit score, here are some factors to consider:
– Try your utmost to pay on time. This stands to reason.
– Stay in contact with lenders. If you get in to trouble paying don’t bury your head in the sand, instead speak with your lender. An arrangement is better than default.
– Deal with disputes and disagreements as a matter of urgency. I’ve seen this many times. You have a dispute with a supplier or mobile phone company and even when you’re in the right you must be careful not to let it escalate to legal proceedings. Most big companies will simply hand the debt over to a specialist recovery company rather than discuss the issue. Before you know it and through no fault of your own, bar a lack of understanding of the system, you can end up with a County Court Judgement which left unsettled will make your credit score plummet. Don’t think that just because your morally in the right you should dig your heals in and ignore correspondence, especially letters of claim and emails. It is most unlikely that you will win so you must communicate and if possible solve disputes before legal action is taken. However, if this is impossible then be sure to attend court, if requested, because if you don’t the courts will issue a judgement against you as a CCJ.
– Register to Vote. Make sure you’re on the electoral roll at your home address, this is essential for locating you and verifying credit credentials.
– Don’t Get Bad Credit by Association. If your partner in life or business has bad credit and your addresses are linked this will have a negative effect on your own score.
– Minimise Credit Applications. Every time you apply for a store card, a loan or even a payment by instalments you will be permitting a search. This leaves a trace even if you don’t take advantage of the application. Too many will cause concern if an underwriter is looking closely at your credit history.
– Use a Credit Rebuild Card. If you suspect your credit is poor or you have limited credit in your name you can use a credit card to your advantage. Buy as much as your permitted but pay it off in full every month. This will show good credit management and an ability to pay and control your spending.
– Refrain from Withdrawing Cash from Credit Cards. Having to use a credit card to get cash is seen as poor money management, it may seem clever to use interest free credit to get cash but it’s unlikely an underwriter will delve deep enough to see this.
– Use Consistent Personal Details. Keep your applications consistent. So, if you still live at home with parents, or sometimes at a partner’s house, use one or the other when applying for credit. It’s logical to use the address you’re registered to vote at but be aware if your bank is at a different address as this will flag a concern.
– Cancel Credit Cards or Store Cards that are no longer in use. Each card will have an agreed credit limit which will all be recorded, even if you haven’t used the card this will restrict further credit application as it would be deemed an open facility that you could use at any time.
– If Possible, Pay Insurance in a ‘Lump Sum’. These payment schemes are credit agreements. No matter how small, the fewer payment plans you have the more you will be deemed a good risk. Paying everything monthly may seem like a good idea but add all these together and suddenly you have a lot of credit in place which may restrict more essential applications.
If you miss payments to a debt or you don’t pay the right amount, your creditor may eventually default your account. This can have serious consequences, and the default can affect your credit rating.
What is a CCJ?
A County Court judgement (CCJ) is a court order which tells you to pay money you owe to a debt. It’s one of the actions your creditors can take as part of the debt collection process.
Received a letter of claim?
Before a creditor can proceed with a County Court claim, they must send you a ‘letter of claim’ in the post, providing details of the debt.
If you receive a letter of claim, don’t panic. You have 30 days to respond with the reply form provided. However, it’s important to reply to the letter of claim within the time-frame given, as a creditor can begin court action if you don’t.
Got a question about debt?