Partner Article

Back to basics on credit reports

It’s finance week on Bdaily and we are looking at the landscape of funding and investment, from both sides of the table. Former Senior Business Manager and Managing Director of NE Money, David Wilson, took us back to basics on credit reporting.

Given that the majority of applications to banks are for significant amounts and will directly affect a business’s performance; credit reports are vital.. However, many of us go into the process with little preparation or understanding of the basics to ‘getting it right’. Lenders at the origination of an application will go to one of the Credit Reference Agencies to establish your Credit Risk, and a decision made from the result of that report. But what is a credit report and how can you manage it successfully?

- If you’re over 18 and have ever taken out a credit card or loan, apart from a student loan, then you will have a credit report, this is held securely by a credit reference agency – Experian is the UK’s largest. The information comes from two major sources. Some is from public records, such as court records and the electoral roll. The rest is contributed by lenders. Some lenders only share negative information, such as missed repayments. Others also share positive information, such as regular repayments.

- Only you can view your credit report. Lenders are allowed access to check your credit history but only when you’ve given them consent. You have a statutory right to see your credit report or any credit information a lender receives. Remember that your credit score will change over time as your circumstances change.

- Lenders use credit reports to assess whether potential borrowers are reliable, stable and do not already owe more than they can comfortably repay. To calculate the chances that you’ll make your repayments, they take the information in your application form and credit report and allocate each item a value. They then use a unique formula to calculate a credit score. Generally, the higher your score, the easier you’ll find it to borrow.

- You don’t have a single credit score because every lender uses a slightly different formula in their calculations. Some even use different formulae for different products, so you could get different decisions if you applied to the same lender for a car loan and a store card.

- Regular checks on your credit report help you to take greater control of your finances. It gives you a snapshot of what you owe and how well you are coping. It could also help you to see where your money is going and identify areas where you could manage your finances better. A good practice would be to check your credit report before you make an application.

- Financial connections are featured in your credit report and this lists the people with whom you share a joint account, such as a bank accounts or mortgages. These people are known as your financial associates. Their credit report details don’t appear in your report but lenders may look them up separately because their circumstances could affect your ability to repay what you owe.

- If you fear that your credit history isn’t good enough, don’t make any new applications. Instead, work on improving your credit report. In the short term, you could close down redundant accounts and register to vote (electoral roll data shows if you have registered as a voter at your current address. Lenders check the roll as a precaution against fraud and as a key measure in your establishing your credit worth).

Understanding what a credit report is and dispelling some of the myths surrounding your credit file are vital for any business owner. The banks take it very seriously so it’s advisable that you do as well. The Credit Scoring System is fatally flawed in the fact it is very black and white in its approach but for the lenders it’s just one of the many ways they can assess a good risk from a bad!

This was posted in Bdaily's Members' News section by David Wilson .