For some reason, credit ratings have always been a bit of a mystery to most people. How are they calculated? What exactly are they? Is there anything you can do to improve them?
The good news is that they are much easier to control than you think, and that’s a good thing. Credit ratings are what are used by major lenders to figure out how much of a risk you are. It sounds a little scary, but it makes sense from their point of view. They need a way to find out whether you’re likely to pay any money you borrow back so they can choose a suitable interest rate to reflect the risk. The higher the risk, the higher the interest rate.
From your perspective, however, it can mean higher monthly repayments and so improving your credit score is actually a good way to make yourself better off, especially if you have a habit of borrowing money. So what do you need to know?
There’s No Such Thing As A Black List
Many people think that there is some sort of naughty list out there that lenders and insurers put you on if you don’t make your repayments. But this isn’t actually true. The reality is that there are multiple lists, each of which has a different credit rating for you based on different information. Some lenders will weight some things more heavily than others in order to come up with a risk score. It isn’t an exact science.
The good news is that there are such things as adverse credit personal loans. If you’ve been rejected a loan from one lender, there’s a good chance that another will be willing to give you money. Often, you can find lenders who specialise in helping people who have a poor credit history and use their tools to decide whether it’s worth taking out a loan.
Credit Scoring Is About Predicting The Future
The whole point of a credit history isn’t to keep a catalogue of your past behaviour and all the ways you’ve screwed up. It’s to help credit rating agencies predict what you’re likely to do in the future. Are you likely to diligently pay back your loans? Or are you likely to default and leave the lender out of pocket?
You can think about this from your own perspective. Are you more likely to lend to a person who has paid you back in the past? Or would you rather lend to somebody who never makes repayments? The choice is obvious.
This is why it can be hard to rebuild your credit score from a low level. When your credit score is low, it means that lenders are less willing to lend to you in any way and that, in turns, means that it’s hard to prove to credit rating agencies that you are capable of making repayments.
Lenders Might Reject You Even If You Have A Perfect Credit History
Many people mistakenly make the assumption that lenders make their decisions about whether to lend based on risk alone. Another part of their calculus is whether you’ll make them money. People who have perfect credit histories and make their repayments on time every month might be low risk, but they’re certainly not very profitable. Not being able to charge interest or late fees cuts into the profits of lenders, making it less likely that you’ll get the loan.
For instance, suppose you’ve got a credit card and you pay it off in full every month. You might think that you’re doing a good job, but from the lender’s perspective, you’re a nightmare. They don’t make any money on you this way, but you cost them a lot in return, including the price of running your bank account and the cost of insuring your credit card purchases. The most profitable people are those who only pay the minimum repayment amount and are always in debt but never default. These people pay lots of money in interest every year, making the lenders very rich.
Lenders Don’t Actually Know That Much About You
Some people assume that credit profiling companies, like Experian, know everything there is to know about you. But this isn’t actually true. Yes, there is a lot that they know about your financial history, but there are a lot of myths out there. For instance, they don’t know about thing about your salary, your medical history, your criminal record, your race or religion and so on. They also have no idea about your council tax arrears or any student loans you owe that started before 1980.