Credit Reports Explained - A Guide To Your Credit Rating

Possessing a favourable credit rating affects a wide spectrum of activities throughout our daily lives. Whether the credit involves a quick purchase at the local store, a dinner in a fine restaurant or to secure major items such as an auto or new home, our credit standing becomes of paramount importance. The embarrassment of having a credit card denied or finding out that the purchase will be delayed due to questionable scores creates a stressful situation. The best approach to take involves understanding how credit rating works and pursuing the appropriate steps to ensure a good personal credit score.

How Credit Rating Works

Everyone who borrows money over time develops a credit score starting with their first credit purchase. As additional financial data accumulates such as debt obligations, issued credit, late payments or defaults, a credit rating is established and maintained at three major credit agencies. The credit score will be higher, or more favourable, if debts are paid on time and no late fees, court actions or unpaid financial obligations are accrued. Higher credit scores are preferred and often allow a consumer to quickly secure credit. Favourable credit ratings also open doors for better deals with lower APR interest rates and less collateral or lower down payment requirements. Consumers accumulate their credit rating by following a few standards:

  • Buying items on time actually builds good credit as long as the practice is not abused.
  • Late fees and overdue accounts should always be avoided and will lower the credit score.
  • Credit scores continually change and should be reviewed regularly.
  • Credit histories accumulate over time and old debts or court actions such as bankruptcies diminish after a set period but may be devastating to a consumer for five to seven years.

How To Find Out Your Credit Scores

Three major credit agencies, Experian, Equifax and Callcredit, maintain a credit file for most citizens of the UK. Many online services offer a free yearly credit report where consumers may check their credit rating and correct any discrepancies. Every adult should take personal responsibility for knowing their approximate credit rating, especially before attempting to purchase a new home, buy a car or apply for a loan. A few points to remember include:

  • Consumers have the right to access their personal credit files at any time.
  • Reports are available through the agencies for a nominal fee or through an online subscription.
  • Any agency requesting credit information such as a bank, mortgage lender or financial institution must have approval from the borrower before they are given their credit report.

How To Maintain and Improve Credit Ratings

By keeping track of a current individual rating, embarrassing moments such as being denied credit may be avoided. There are several methods to maintain a healthy score and to improve poor ratings:

  • Limit the number of credit cards on file and avoid new applications.
  • Close old or unused accounts immediately.
  • To improve a low score, borrow a small amount on a personal loan and pay it off quickly or in a timely manner.
  • Be aware that credit ratings are used by a wide variety of lenders including banks, utility companies, insurance companies and retail merchant.
  • An employer may request a satisfactory credit report before offering a job.