Your credit rating could be wrong so don’t let it ruin your financial life

Credit scores are the foundation of our financial lives. They handle everything from whether you’re approved for a mortgage to interest on your credit card – and even whether you can get a phone plan.

Yet a study by Wealth & Personal Finance found that credit scores are often riddled with errors and inconsistencies and often misunderstood.

Their shortcomings can cause some people to be unnecessarily turned down for loans or pay higher interest rates, and others to run up debts they can’t pay.

Our findings come at a time when accurate credit scores are becoming increasingly important. With the cost of living falling, households cannot afford to have their incomes eroded by unnecessarily high interest payments.

More and more households depend on debt to make ends meet. Credit card lending rose to its highest monthly level since 2004 in November, the Bank of England announced last week.

HOW THEY WORK… AND WHAT THE REVIEWS MEAN

Three credit rating agencies collect information on every adult in the UK to paint a picture of our finances and ability to manage debt.

These agencies — Equifax, Experian, and TransUnion — collect data from banks about whether you’ve borrowed in the past and whether you’ve ever missed payments.

They scan the electoral roll to see if you are registered to vote, find your current and previous addresses, and check if you are financially connected to anyone else. They will also look for information about whether you have been bankrupt or struggled with debt in the past.

Banks and other lenders then buy this information from the agencies and use it to help decide whether to extend credit to individuals and what interest rate to offer. The higher the credit score you have, the more likely you are to be accepted for an affordable loan. It is therefore crucial that the information available to credit rating agencies is correct.

But when Wealth & Personal Finance requested our credit reports, we found that they differed significantly between agencies.

by Sarah Davidson three credit rating reports ranged from “fair” to “very good.” One agency had details about its credit cards, another had no details. Four previous addresses of her were found; another found six.

One of the Toby Walnes credit reports said he had “three finance associates.” Upon further digging, he discovered that all three were his wife.

He got a perfect credit score of 1,000 out of 1,000 from one, so he wondered why he was marked down to 999 by another. Confusingly, though, each credit rating agency uses a different scoring system whether it’s 999, 1,000, or 710 Worryingly, a report claimed Toby’s home address was removed from the electoral roll in September – news to him. Toby plans to call the council tomorrow to investigate.

Rachel Richard Straus credit ratings ranged from 877 to 970 out of 999, despite entering 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, it was significantly downgraded to 755 out of 999 by another as it revealed a confusion over a single monthly cell phone plan payment many months ago.

A recent study by the city regulator suggests that the degree of discrepancies we found are alarmingly common.

The Financial Conduct Authority compared the credit information from the three rating agencies for tens of thousands of randomly selected people. It found that between 35 and 57 percent of individuals have “materially different” credit scores, depending on which agency is used. The regulator is currently investigating the market over concerns that there is little competition between credit rating agencies and that substandard credit information could inadvertently hurt people’s credit scores.

CONTACTING A LENDER CANNOT HARM YOUR SCORE

The FCA also found that a poor understanding of credit scores could hurt people’s finances. For example, it found that 47 percent of borrowers in financial distress are hesitant to talk to their lenders because they mistakenly believe that contacting lenders can hurt their credit score.

It means that struggling borrowers are unnecessarily missing out on help and support to pay off their debts.

Sixteen percent have ignored contact with lenders as a result of this misconception.

In addition, 43 percent of consumers don’t realize that everyone is entitled to free access to their credit report.

There are various paid services – some as high as £15 a month – but a basic report detailing what information is being tracked about you can be accessed without payment.

Dividend: The three major rating agencies gave the Wealth team different credit scores

WHAT YOU CAN DO TO IMPROVE A RATING

The FCA has asked the credit score industry to establish a new representative body this year and has said they will work together to agree further improvements. However, all this can take months.

But there are things you can do to improve your credit score and make sure the information about you is accurate.

1) Check yours every year. By law, all credit reporting agencies must provide you with a copy of your credit report free of charge.

You can choose to sign up for a paid service, but don’t be fooled if you prefer a free version. The FCA says it has found evidence of “dark patterns and sludge practices” by some agencies, making it difficult for consumers to access their free report. Links to free reports are often hidden, while paid ones are advertised as “free,” while only the first trial period is free, it says.

2) Make sure everything is correct. The most basic of inconsistencies can undermine your score, warns Justin Moy of the mortgage broker EHF Mortgages. “Make sure all your addresses for the last six years are correct and that your financial statements and driver’s license also show your last address,” he says. “We often see a low credit score if information does not match, for example if a bank account is registered at your old family address.”

3) Keep your personal information up to date. If you change your address or name, tell everyone who needs to know. A parking ticket sent to an old address and left unanswered may be enough to get you slapped with a district court judgment, which can hurt your credit score.

4) Make sure 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 it. Lenders will often want to see that you have a good track record of taking on and repaying debt before granting larger amounts, for example a mortgage. Before you sign up, use one of the free online tools to check which cards you’re likely to be accepted for so you don’t hurt your credit score by being rejected.

Go for a zero percent purchase deal, which means you don’t have to pay interest for a certain period of time and you spend little and often. Pay off the balance in full every month without fail.

6) To get a good or excellent score, try to have some credit facilities where you don’t regularly borrow to your limit, says Samuel Mather-Holgate, an independent financial advisor with Mather and Murray Financial. “Always pay on time and don’t keep taking out credit and closing accounts,” he adds.