Every 60 days I get an email that fills me with dread and the subject is something I know very little about - my Credit Score. Every time I open it I fear that my treasured rating of “fair” may have changed to, well, “not fair” I guess. Why would it have changed? I don’t know. I didn’t take out any credit in the last 60 days. I paid off a reasonable amount of my credit card bill, and generally, everything was business as usual. But the fact remains that as I barely know what got me “fair” rating in the first place, I can only guess as to why it would change.
In the meantime, I’m surrounded by horror stories of people losing any hope of getting a mortgage because they somehow got a rating of “Haha, goodbye dreams”.
The credit score is a true enigma. I must say that I completely understand why it exists and the need for it. If I was lending someone enough money to buy a house I’d buy a copy of their financial history too, but as with so many things, it’s not an issue of why, but how. How can we know so little about something that affects us so much?
Firstly, there is no universal rating system. The big three credit reference agencies (Equifax, Experian and Callcredit) all use a different scoring system; one man’s “fair” is another’s “yikes.” To double-down on the confusion there’s also no way to find out how they define their ratings.
To triple-down on it, the company lending you the money only has to choose one agency to deal with, while you (the consumer with no understanding of the industry) has to worry about all three of them. The reason? Say you go to your bank to ask for a mortgage or loan. They’ll have a contract with one of the agencies (they may use more than one) to review the credit history of all of their mortgage applicants which will then dictate whether or not they are prepared to lend you money.
Some banks will tell you outright which agency they use and some will tell you when asked, but, as they are by no means obliged to, some may not tell you at all. Unless you’re certain which agency they’ll use for your application you’ll need to make sure you have a good rating with all three.
Rejection
The main reason your request for credit will be rejected is because you have a poor credit history.
It’s that simple. Another reason you might be rejected is that your address is spelt incorrectly on your file or application. That actually happened to me. Before getting married, my fiance and I went shopping for her wedding ring and decided to take advantage of (or were we being taken advantage of?) the store's offer of 0 percent Finance. When they ran a credit check we failed for the simple reason of writing our address in a different format to the one the credit agency used.
Your credit score is a minefield. The story of my wife’s wedding ring reminds me that these days we are increasingly dealing with systems and not people - there is no leeway. If the decision to give me credit was made by a person looking at the two addresses then it would have been fine, but with a computer that is told to check if ‘Address 1’ matches ‘Address 2’ you have to be extremely vigilant in ensuring all the information that companies have on you is correct.
Keeping score
That’s why you should check your credit score long before you want to apply for credit. For the luxury of checking you’ll need £6. You can get a copy of your report from each of the Big 3 agencies for £2 each and of course, you need all three because you don’t know which one might be used.
By the way, you’ll want to be doing this about a year before you plan to apply for your mortgage so you’ve got plenty of time to get your score up. Of yeah, don’t forget all three agencies will use a different scoring system so doing something differently might increase your score with one, but make no change at all with another. Until you apply for a loan, or actively check your score there is no indication in your life about whether it’s good or bad.
The sense of dread comes when you think about it. It’s like waking up in the night and thinking there is a monster in your closet, but if you want to open to door to quell your fear you’ve got to pay to do it before you can get a good night sleep.
I used to think that not having a credit card was good. It gave me a sense of pride actually, I thought ‘I can manage my money well’. That isn’t going to help you with credit scores. In fact it will probably make it worse. A credit score is basically there to say how well you pay back money, so if you’ve never owed anyone money then no one knows how good you are at paying it back.
Educated guesses
The crux of the issue isn’t credit scoring itself, it’s how little we know about it.
We increasingly rely on people like Martin Lewis (of "Money Saving Expert") to educate us on these financial minefields, but he shouldn’t have to because we should have been taught about it already. If only there were several thousand of him we could send into schools to teach teenagers about credit scores (and while he’s at it: mortgages, credit cards, loans too). It’s high time the government realised that teaching about personal finances needs to be a standard part of the curriculum.
Every year the financial world gets more confusing as more products and services get introduced, but the average person barely understands how their credit card works. It’s not enough to say that parents should be teaching their children about personal finances because they barely know anything about it either.
The economy is the source of most of the highs and lows throughout life whether we know it or not. It frames most political debates and is where most political promises are made and broken. The financial world doesn’t care if we understand their products or not - actually, if anything they’d probably prefer if we didn't understand - so someone needs to teach us. Let the markets play their games, but the government needs to at least explain the rules to us.
