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Why your credit score matters

Photo credit: Lending Memo

The financial crisis brought with it low interest rates and some of the cheapest loans, mortgages and credit cards in history.

But one of the many negative consequences of the economic downturn is that large numbers of people have been effectively barred from the best deals due to poor, damaged or even non-existent credit histories.

Banks’ immediate response to the credit crunch was to apply much stricter criteria to all kinds of loan applications and not much has changed since: so if you’ve had credit problems in the past, you stand a higher chance of being turned down for that ultra-low 10-year mortgage, low-cost loan or two-year interest-free credit card.

So what can you do to identify and put right credit problems?

1. Check your report

Before you apply for any sort of credit, it’s worth checking the state of your credit record even if you don’t think there are any black marks on it.

Britain has three major credit-reference agencies, Callcredit, Equifax and Experian. These firms hold files on people who have signed up for credit agreements in the past, and they are consulted by banks and other lenders when deciding on loan applications.

If you want to see your credit record these agencies offer you access to your report for a monthly fee and give you advice on applying for credit and monitor your file to make sure no fraudulent loan applications are made in your name.

But you are allowed by law to request a hard copy of your record – your statutory credit report – from each agency for just £2 a time. You can follow the links above to order yours.

2. Correct any mistakes

In some cases there will be information on your report that you don’t agree with – for example a debt from a previous occupant of your home has been put on your record or you may have a financial association still active from a previous relationship.

First, contact the lender or company that put the note on your record and ask them to correct their error. You can also tell the agency that you dispute the record, and ask for a comment to be added explaining your position.

3. Build a better credit history

If your credit problems are being caused by a mistake on your record, you may be able to sort matters out quickly.

But if you have had genuine issues such as missed repayments in the past, putting things right will take time: these black marks stay on your record for six years under current rules.

What you need to do is show potential lenders that you have got back into good habits, this can involve taking out some form of credit if possible and start making repayments on time to show you are a responsible and reliable borrower.

Credit-building credit cards are a good solution. They are aimed at borrowers with damaged credit histories and charge high rates of interest as a result. But you can avoid all interest charges by paying off what you owe at the earliest opportunity.

There could be other reasons you are being turned down for credit or not being allowed to sign up to the cheapest deals. A common one is that you are not registered on the electoral roll at your current address: this is something all lenders will check and is very easy to correct.

Another issue could be that you have simply never taken out credit before, so your record is non-existent or blank. In this case consider taking out a credit card from your bank – it may be more willing to lend to you as it already knows who you are – or even signing up for a pay-monthly mobile-phone contract, which is another type of credit agreement.

Making these changes doesn’t mean that credit providers will automatically give you a loan, mortgage or a credit card as each lender has their own set of strict credit criteria. That said, it is important to fix any issues sooner rather than later and to know your score for future applications.

If applying for credit, look for services that provide you with a personalised free soft search quote, this is important as they don’t mark you credit file if you choose not to take up the offer or if your credit score does not meet the required standard.