What is credit?+
In the world of finance, credit typically refers to one of the following:
1. A consumer being able to obtain a product or service before making a payment, on the basis that this payment will be made in the future either as a one-off purchase or via regular instalments.
2. A sum of money that is lent to or borrowed by a consumer.
3. A reference to a sense of trust between the lender/business and the consumer to carry out a credit agreement.
The word ‘credit’ originally comes from the Greek word ‘credere’, which simply means ‘to believe’, and it’s this sense of believing and trusting that comes into play when it comes to accessing and repaying credit.
What is a credit report?+
A credit report is an important financial document that contains the records of all your credit-related activity that has taken place during the past six years.
Your credit report can include any purchases that you make using a credit card, any credit agreements that you have set up in order to buy something on a finance scheme, and any loans or mortgages that you may have taken out.
What is a credit score?+
A credit score is a numerical value that indicates your level of creditworthiness, i.e. how likely you are to be able to make credit repayments regularly and in full. Ranging between 0 and 999, generally speaking, the higher your credit score is, the less the financial risk you are likely to pose to lenders.
Conversely, a low credit score could suggest to lenders that you have had issues with making credit repayments in the recent past and therefore might be more of a financial risk for them.
What is a credit rating?+
This refers to a rating system that exists to help lenders and other relevant third parties gauge how trustworthy a potential borrower is when it comes to making credit repayments.
This is known as a consumer credit rating and ought not to be confused with credit ratings given to countries, as the scales are different. Consumer credit ratings range between 1 to 5 in either numerical value or stars, where the 1 indicates a poor credit rating and 5 indicates an excellent credit rating.
What is a Statutory Credit Report?+
According to the Consumer Credit Act 1974, anyone who is aged 18 and above is entitled to obtain a copy of what is known as a statutory credit report.
You can apply for a copy from any of the three credit reference agencies in the United Kingdom, which are Experian, Equifax and Callcredit and it will cost you £2 every time.
Your statutory credit report shows your credit history and includes information that is both public and private in nature.
This information is given to lenders who wish to carry out an assessment of your credit profile as a part of processing any credit applications that you submit to them.
What is a credit check?+
A credit check is when a potential lender, employer, landlord, retailer or even you yourself are looking to ascertain how financially trustworthy you are when it comes to making credit repayments.
If you are aged 18 years and above then you are eligible for a credit check, which involves calculating your credit score using data on your credit activity that comes from your credit report.
What is a hard credit check?+
A hard credit check is usually carried out by lenders when you are looking to take out a large personal loan or a mortgage for a property, in order to calculate your overall credit score. A hard credit check can affect your credit score, and they are carried out each time you submit a mortgage or personal loan application, so if there are several of them carried out one after the other, it could indicate to the lender that you are desperate for cash.
What is a soft credit check?+
Soft credit checks are used by lenders, retailers, landlords and other businesses who wish to check your credit score for the purposes of a background check. When you check your own credit score or view your credit report, this is also considered to be a soft credit check.
While soft credit checks are recorded on your credit report, these do not affect your credit score.
What is a good credit score?+
A credit score is a 3-digit numerical value, ranging from 0 and 999, with a good credit score at the upper end of this range. A good credit score indicates that a consumer has been making credit repayments on time, every time and in full amounts, and is likely to be viewed more positively by lenders and other third parties.
What is the highest credit score possible?+
Credit scores and credit reports are generated by Credit Reference Agencies. There are three of these in the United Kingdom: Experian, Equifax and Callcredit.
Even though credit scores can be of any 3-digit value between 0 and 999, the credit reference agencies have their own ranges that fall within this overall range.
So, according to Experian’s credit score range, the highest credit score possible is 999, according to Equifax this is 650 and according to Callcredit this is 800.
What is a Credit Reference Agency?+
When you apply for a loan, credit card, mortgage or a credit agreement of some kind, the credit provider may look at your credit reference file to help them decide whether you are likely to pay back the credit and any additional charges, such as interest fees.
Your credit reference file contains data that reflects your credit-related activity for the last six years, which is generated by these Credit Reference Agencies, of which there are three in the United Kingdom: Experian, Equifax and Callcredit.
How can I improve my credit score?+
There are a number of steps you can take to help improve your credit score. As well as making sure to avoid making late payments, checking your credit file on a monthly basis, closing any unused credit accounts, financially disassociating from any ex-partners, spouses and business associates, using a ‘credit-building’ credit card, and watching out for any CCJs and court orders can all help. You should also make sure you are registered on the electoral roll, and check if there are any errors on your credit report that need correcting.
How can I check my credit score?+
There are various online credit checking services where you can check your credit score. Providing some basic information, as well as answering some screening questions to ensure that identity fraud is not being committed, will give you access to your credit file and your corresponding credit score
Does checking my credit report affect my credit score?+
No. When you check your own credit report, your credit score is not affected. Checking your own credit report is viewed as what is called a soft credit check, which does not get recorded in your credit file.
What should I do about errors on my credit report?+
We suggest that you contact the credit provider to inform of them of any errors on your credit report and supply any evidence that supports your claim, such as credit statements.
If your claim is successful, then you may need to allow 28 working days for the corrections to be communicated to the credit reference agencies, who would then reflect these on your credit report.
What should I do if I’m refused credit?+
When you apply for any form of credit and get rejected, this is more than likely because of a low credit score, which can indicate to lenders that you might have issues repaying the debt. You should check your credit report for any issues or errors that could be affecting your credit score, and try and rectify these before applying for credit again.
UK Legislation and Regulations
What is the Electoral Roll/Register?+
In order to be able to vote in all UK elections, you would need to be registered on the Electoral Roll. To achieve this you would need to be: - Aged 18 years and above on the polling day
- A British citizen, or
- An EU citizen resident in the UK, or
- A qualifying Commonwealth citizen resident in the UK
It is also important to be registered on the Electoral Roll so that other bodies, such as Credit Reference Agencies, can verify your identity and address details.
What does Subject to Status mean?+
In the world of finance, the term ‘Subject to Status’ usually refers to your application for credit undergoing various checks to help lenders decide whether you are creditworthy enough.
These checks could include an identity check, address verification, employment history check, and a credit check.
If you pass all these checks then you are likely to be granted the credit that you have applied for, having satisfied the criteria for being a creditworthy consumer.
What is Data Protection?+
We live in the Digital Age, where banks, businesses, retailers, hospitals, the government and various other organisations digitally record and store our business and personal information. The Data Protection Act is designed to ensure that all this information is adequately protected from cyber criminals, to prevent identity theft and online fraud that could impact consumers’ credit scores. This is why data protection is important.
What is Payment Protection?+
In the event that a borrower dies, suffers from a long-term illness or accident, loses a job, or faces some form of hardship that makes them unable to pay off any existing debt they may have, Payment Protection can help them cover the repayments in these situations.
This is usually sold as an insurance product and can be known as Payment Protection Insurance (PPI), loan repayment insurance, credit insurance or credit protection insurance.
What is Online Fraud?+
When someone electronically accesses your account in order to acquire your confidential details such as passwords, credit card details, etc., without authorisation and to use for their own financial gain, this is known as online fraud. Online fraud can impact credit files and affect credit scores, so it’s advisable to take precautions.
What is Identity theft?+
When someone’s identity - i.e. their name, date of birth, address, passport number, bank account numbers, credit/debit card numbers, passwords, etc. – is stolen and then used by the fraudster for their own financial gain, this is known as identity theft.
The difference between identity theft and online fraud lies in the potential victims of the crime being committed. With identity theft, it is likely that the consumer, their credit card provider and any retailer/merchants that the consumer has made purchases from via card payments are the affected parties.
How can I protect my information online?+
For every genuine website, there may be several that are not. So, it becomes important for you to protect your personal information online.
There are several ways in which you can protect your payment details when shopping online, such as: creating complex passwords, checking for the padlock symbol in the web address bar of your browser (as it indicates that the website is securely protected with digital encryption), and using antivirus software to keep your tech safe.
What is a County Court Judgement?+
If someone takes court action against you saying that you owe them money, you are typically given 14 days to respond to this claim. If you fail to respond, then a County Court Judgement (CCJ) could be issued to you, confirming that as far as the law is concerned, you do indeed owe them the money.
How long do CCJs stay on your credit file?+
CCJs stay on your credit file for six years. However, if you pay the money owed within a month of it being issued, then the judgement can be removed from your credit report.
What are arrears?+
In the world of finance, arrears refer to money that is owed and has not yet been paid. For example, a year’s salary is paid to an employee in monthly arrears, in return for work to be carried out by the employee.
However, arrears can also refer to parts of a debt that have not been paid, including missed or late payments.
How long do arrears stay on your credit file?+
Arrears can stay on your credit file for six years.
We would suggest that you hold off from making any credit applications until any arrears history reaches its expiry date. It could contribute to a lower credit score, which may put off potential lenders and other credit providers.
What is a Default?+
A default is typically registered when three or more credit repayments are missed, and usually results in the total amount of the credit and any interest charges becoming due for payment.
How long do Defaults stay on your credit file?+
Defaults can stay on your credit file for six years.
It might be in your best interest rates to hold off from applying for further credit until after this time, as it could give the impression to lenders and other third parties that you are not creditworthy.
Credit Cards, Loans and Interest Rates
What are credit cards?+
A credit card is a form of payment that allows consumers to make purchases up to a specified limit, and pay the card provider back – either the full amount due or parts of it – on a specified date on a monthly basis. Consumers who are most eligible for a credit card usually have a high credit score and a regular income.
What are charge cards?+
Charge cards are similar to credit cards in that eligible consumers can use it to make purchases, but the difference it is that they would have to repay the full amount borrowed on the date specified in the accompanying credit statement.
What are the different types of interest rate?+
There are different types of interest rates, including: fixed rate, standard variable rate, capped rate, first and second charge rates. The type and level of interest rate is important when applying for any form of credit, as it will affect how much a borrower would have to repay, in addition to the loan amount and any other charges that could be incurred.
What is a Credit Builder Credit Card?+
Depending on how low your credit score is and your personal financial circumstances, you could apply for what is known as a ‘credit-builder’ credit card, which is a credit card that is specifically designed for those consumers who have bad credit. ‘Credit-builder’ credit cards are suitable for those consumers who are not likely to be granted credit from mainstream lenders.
These types of credit card give you access to limited amounts of credit; and as long as you can make the repayments in full and on time each month, it can help you to build a better credit history, which can help improve your credit score too.
What is a Guarantor Loan?+
Guarantor loans are a particular type of loan that can help those with low credit scores borrow money. Guarantor loans involve a second person, who is not financially connected to the applicant, is over the age of 21 years and has a good credit score.
The guarantor acts as the ‘security’ for the lender, and agrees that if the borrower is unable to pay back the loan, they will repay it on their behalf. Both the credit applicant and the guarantor are subject to credit checks and other verification procedures as a part of the application.
What is a PayDay Loan?+
A payday loan is what it says on the tin – i.e. you borrow a small amount of money and pay it back when you next get paid your weekly wage or monthly salary.
We think payday loans should only be taken out if you know for sure that you can repay the loan amount back on time and in full, so as to save yourself from accruing high interest charges.
What is a Credit Account?+
When you purchase something from a business or a retailer that allows you to pay the total cost of the item on a weekly or monthly basis over a defined period of time, you then have what is known as a credit account with that business or retailer.
These are typically advertised by retailers as so-called, ‘buy now, pay later’ offers – which are actually offers for you to open credit accounts with them.
What is Hire Purchase?+
Through a hire purchase agreement you are effectively borrowing and buying something at the same time, as these types of credit agreement enable eligible consumers to purchase a product or service, but pay the full price in instalments. This sort of purchase plan can also be referred to as a conditional sales agreement.
What is a Finance Agreement?+
A finance or credit agreement refers to a scheme where the consumer enters into an agreement with a retailer or business, to pay for a product or service in regular instalments, usually monthly.
‘Pay Monthly’ mobile phone contracts, buying household appliances ‘on finance’ and purchasing items using a credit card are all examples of finance agreements.
What is a Debt Consolidation Loan?+
A debt consolidation loan allows a consumer to pay off a number of other debts, thereby consolidating the money they owed on these debts into one loan and one monthly payment.
Debt Consolidation Loans may be appropriate when a consumer would struggle to pay off their debts otherwise, or they simply want to reduce their regular debt repayments. However, we would like to add that debt consolidation loans are only beneficial if low interest rates are charged.
What is a Logbook loan?+
As the name indicates, a logbook loan is when a loan is secured on your vehicle, which means the lender owns your vehicle until you repay the loan in full.
As long as you make the loan repayments on time, you can keep on using your vehicle as normal while you repay the loan.
What is a Bad Credit Loan?+
When a consumer struggles to pay off multiple types of debt, this debt accrual can be referred to as having bad credit.
There are certain loans available in today’s marketplace that help consumers with bad credit to pay off their existing debt and come in secured (i.e. where assets are involved) and unsecured (i.e. where no assets are used as collateral) forms.
Such loans are known as ‘bad credit’ loans and can also be known as adverse credit loans and debt consolidation loans.
What is a Secured Personal Loan?+
A secured personal loan refers to when money is being lent to the borrower using the borrower’s home or other valuable asset as a form of security or collateral.
So, should the borrower be unable to pay off the loan in full then their asset will be used to make the repayment.
This lessens the risk for the lender granting the loan, but becomes a risk for the borrower as their home or other collateral is at stake.
What's Your Credit Score?
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