Credit reference agencies (CRAs) are companies that look into borrowers’ financial history to give lenders an idea of how well they manage debt and how much debt they are currently in. Lenders can then make an informed decision on how much of a risk they are and whether or not to lend to the applicant (or whether to only offer products designed for higher-risk applicants). This snapshot is often called a “credit score”.
If you’re looking to take out a credit card, it can be upsetting and worrying to find out you have a poor credit score. But it might not be as bad as it seems. Let’s have a look at the options.
A large number of factors feed into a person’s credit score. Seemingly small things like making a lot of credit applications over a small period of time can cause temporary blips in an otherwise good rating. But there are also large factors, like absence from the electoral roll and County Court Judgements, bankruptcies and a long history of missed payments, that all set alarm bells ringing.
Have a look at our guide on how to fix your credit score for more information.
A credit score is a sliding scale, from very bad, through moderate, to perfect, so there’s really no standard ‘bad’ credit score – just degrees of imperfection.
When you make an application for a loan, credit card, hire purchase agreement or mortgage, the lending company will look at your personal circumstances to determine whether you’re likely to be able to afford to repay the amount. They’ll also run your name past a credit reference agency to get your credit score.
This score will determine whether your past financial history makes you a person who is likely to repay the debt, and you could be declined outright. However, if you pass the lender’s criteria for being acceptable, the CRA’s score will then determine whether you’re eligible for the best interest rates (as advertised) or a higher interest rate to reflect the increased risk you represent.
Virgin Money doesn’t add interest to the advertised rate for applicants lower down the credit score scale. We keep it simple by having just three responses to a credit application:
Other credit providers may still offer a product but not at the rate advertised instead providing a worse offer in line with a lower credit score.
Of course, CRAs can only use your past performance as a gauge to future behaviour, so there’s an obvious flaw in the system. One person might have been perfect in the past but could go on to become irresponsible, and another person might have had troubles in the past but is now over them and ready to borrow.
Unfortunately, CRAs are the best we’ve got, and it has to be said they have proved to be pretty good at predicting the risk posed by credit applicants.
That’s why it’s important to try and prove yourself as financially responsible for as long as possible before applying. Old issues will drop off the credit score, with minor problems being removed the quickest. If you can maintain a flawless record for six months of active credit use, this should position you in good stead for the future.
If you’re sure that your credit score is wrong, you can dispute it. Although you’re unlikely to know exactly which organisation has given a bad report to the CRA, it’s worth getting in touch with any that you’re suspicious of to point out the error. They’re unlikely to correct it straightaway, as they only report monthly, but it could help.
If you’re not getting any joy from the companies, you can raise a dispute with the CRA itself. They usually have channels to do this on their websites. We’ve written a quick guide to making claims that expands on this one.
If your credit application is declined, keep on top of your bills for a few months and try again. You might find your rejection was marginal and that you’ve lifted yourself into the positive zone. Just be sure not to make too many applications, as this can affect your credit score. Patience and good money management are the keys to improving your credit score. You can also sign up services like Noddle, Experian and Clear Score who will all provide you with a credit score you can monitor and hopefully see improve.