Understanding Your Credit File.
Your credit file is also known as a credit report or credit history. It is important that you understand what your credit file is all about. It can be hard to navigate the credit minefield, which is often littered with technical credit file terms and governed by rules that many of us do not understand. This guide is designed as a route planner that will take you from A to Z. Probably the best place to start is by viewing your own credit report.
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A is for APR
This stands for annual percentage rate and is the true cost of a deal, including fees and charges as well as interest, over a year. As it includes everything you pay, it can be higher than the interest-only rate. Adverts tend to cite the ‘typical’ APR, which is what at least two thirds of successful applicants will pay – you may be given an offer of more or less than this figure, depending on your credit file status.
B is for bankruptcy
Even if you believe that there’s no way out of your debts, this should be a last resort. It will help you get out of debts and you can officially be discharged in as little as a year but it is recorded on your credit report. Your credit file history will record your bankruptcy for six years irrespective of when you were discharged.A bankrupt will find it difficult to borrow in the future. The same applies to anyone who has an IVA or the new Debt Relief Orders (DROs).
C is for Credit File
A credit file is also known as a credit report. This is the personal history of your credit accounts, from loans and cards to mobile contracts and catalogs, along with your repayment record and other information that helps lenders to decide whether you can comfortably afford to make your repayments. It should be up to date and accurately reflect your circumstances or you could miss out on the deals you want. A perfect credit file report is one where there are no missed payments and all payments have been made on time.
D is for debt Management Plan
A debt management plan is a informal agreement between a debtor and their creditors. A Debt Management plan aims to help reduce your outstanding unsecured debts with a reduced monthly payment for a fixed time period to assist the debtor to hopefully regain control of their finances. When someone finds themselves in a debt management plan they normally have a bad credit file which can last for many years during and after the plan has finished.
D is also for debt. The credit crunch, recession and low interest rates have encouraged many of us to focus on repaying our debts but it’s better to ensure that you don’t borrow too much in the first place. Before you apply for yet another credit deal, take a look at your credit file report. It will give you a snapshot of your financial position and how well you’re managing.
E is for early repayment charge
This is just one of the fees that may be lurking in a credit agreement – a penalty if you repay the full amount before the date its due. Look out also for arrangement fees and late payment fees when you’re assessing possible credit deals.
F is for financial associate
If you have a joint credit account, such as a card or mortgage, the person you share it with is your financial associate and will be listed in your credit file. Lenders will check the other person’s credit file report as well as your own, as their circumstances could affect your ability to make repayments. If you separate, you should remember to close any joint accounts and reapportion the debt, or you could be penalised if your ex-partner has money problems.
G is for guarantor
A guarantor guarantees repayments but isn’t the borrower. Say you’re a parent acting as guarantor for a student who needs a loan – if your offspring misses payments; you are responsible for the repayments, interest and any penalty charges.
H is for hire purchase
This is making a comeback after years when it was displaced by spending on interest-free credit card deals. Essentially, you pay for an item such as a car or washing machine in fixed installments. The seller or lender can take the item back if you default on repayments and it is illegal for you to sell it on – you only own the item when you’ve made the final payment.
I is for Individual Voluntary Arrangement which is often referred to as an IVA
An IVA is a contractual agreement between a debtor and their creditors. It happens when a debtor is unable to pay their priority creditors the money that they owe. An IVA is administered by a Insolvency practitioner and is governed by the Insolvency Act 1986.
I is also for interest. Lenders cover their costs and make a profit by charging a percentage of the loan, card spending, mortgage or other form of credit – this is interest. For example, annual interest of 15 per cent means that £15 is charged or paid for every £100 borrowed for a year. More commonly, interest is calculated and added to what you owe far more frequently – daily, weekly or monthly, for example. This is why the APR is so important – it’s the only way most of us can easily see what we’ll actually end up paying.
J is for judgment
If you fail to keep up your monthly repayments, you can be taken to court and a judgment against you may be issued. For example, you may be told to pay what you owe or bailiffs may be sent in. If you pay the debt within a month of the judgment, it can be cancelled. If you pay after then, it will appear on your credit file for at least six years. It will lower your credit file rating and it will be harder for you to borrow although the entry should be marked as Satisfied if you pay off the debt.
K is for knowing how lenders make decisions based on your credit file
Lenders look for two main factors when they assess the risk that you won’t repay them: a history that suggests you’re a reliable borrower who makes payments on time and in full and evidence that you can afford those repayments. Your credit file contains your track record and shows how much credit you already have. Your application form includes data such as what you earn and how many dependents you have. Each item is allocated a value and the total is your credit score – also known as your credit rating. The higher your score, the more likely you are to qualify for the deals you want.
L is for loan shark who is not interested in your credit file
An unlicensed money-lender, often charging very high interest rates and employing forceful collection methods. Best avoided.
M is for myths
Despite popular myths, your address, gender, race and religion have no effect on whether or not you get credit – and credit blacklists don’t exist. Credit reference agencies don’t make any decisions about who gets a yes or a no. And you can check your own credit file report as often as you like without damaging your credit status. M is also for Money Saving Expert who can provide you with information to protect your credit file based on their experience and financial knowledge.
N is for new accounts
There are times when it seems sensible to open a series of new credit accounts in a short time – when you’re furnishing a new home and taking advantage of interest free deals, for example. But if you’ve opened several accounts within a few months, lenders may be reluctant to give you more credit, in case you overstretch yourself.
O is for overdraft
When you take out credit, you get access to money, goods or services now and pay for them later – which makes an overdraft a form of credit. As such, your bank will want to see that you have regular income and a good financial track record before granting you an authorised overdraft. This will charge less interest than an unauthorised overdraft, where you’ve gone into the red without permission.
P is for price comparison sites
These have revolutionised the process of tracking down the most appropriate credit, making it easy to see what credit deals you might qualify for and what they’ll cost. It’s crucial to input accurate and up-to-date information, though, or you’ll be shown offerings you may not get. By using LowerMyBills from Credit Expert, you can save money and improve your chances of getting credit as it takes information from your credit file to match you to the credit cards, loans, mortgages that you are more likely to be accepted for.
Q is for quotation search
When you make an application, lenders search your credit report, leaving a record known as a footprint. If other lenders see a lot of these in a short period, they may suspect that you’re desperate or that someone is planning a fraud. If all you want is information, always ask for a quotation search, which won’t be seen by other lenders. If you spot any footprints on your credit file that aren’t the result of a full application but are recorded as such, ask for them to be changed or for a note of explanation to be added.
R is for registering to vote
Lenders use the electoral roll as a precaution against fraud, to check that you live where you say you do. If you’re not registered or are down at an old address, they may ask for further proof of residence or even turn you down. Ask your local council about registering or go to aboutmyvote.co.uk.
S is for score
Lenders calculate a credit score when you apply for a credit card, loan or mortgage so the higher your score, the better your chance of getting the best deal. You don’t have a single credit score because every lender uses a unique calculation – some even use different formula for different products, such as a loan and a card. And it isn’t fixed forever. You can improve it by taking active control of your credit history – for example, ensuring you don’t skip repayments, closing unused accounts and registering to vote. It’s also important to apply for the right product for you, to reduce the chances of being turned down for credit. LowerMyBills from CreditExpert enables you to do this.
T is for terms and conditions
These are the rules that govern a financial agreement – for example, the amount you must repay and when.
U is for unsecured loan
A secured loan is one where you’ve been lent money using some form of property or asset, such as a house or car, as security. The lender can repossess the item the loan is secured on if you fail to make repayments. With an unsecured loan, such as a credit card, the lender does not know that it can ultimately get its money back. The risk is higher, so interest rates are usually higher too.
V is for veracity
In other words, always tell the truth to lenders. It’s fraud if you lie and you will, inevitably, be found out, which could trigger legal action and will make it difficult for you to borrow in future. Lenders will check your credit file when you apply for a mortgage, loan or credit card, so make sure you check it before you apply to ensure it’s accurate.
W is for wishful thinking
It pays to select the credit that suits your circumstances, instead of giving in to wishful thinking. You might like a £100,000 mortgage but you’re unlikely to get it unless you have a substantial deposit, a good salary and an excellent credit file report. It’s better to save and work towards your ambitions, taking on smaller credit accounts while you build a good track record. Regular checks on your credit file will give you a snapshot of what you owe and how well you’re coping.
X is for eXtravagance
We’re all guilty of extravagance from time to time but if you’re always overspending, you’ll end up in debt and unable to reach your financial goals. If you find yourself contemplating a new card or loan to pay other debts, you need help. For free debt management advice, try Citizens Advice at, National Debt Line or the Consumer Credit Counseling Service .
Y is for Yes!
Lending may never return to the way it was at the height of the credit boom but things are easing for people who’ve got an excellent credit history. Be sure to check your credit file every time you’re thinking about making an application. If you find any items you don’t recognise or disagree with, challenge them with the relevant lender – it could make the difference between a “Yes” and a “No”.
Zzzzz is for the small print
It may make you feel like nodding off but don’t give in to temptation – read the small print thoroughly. You need to know exactly what you’re getting into, what rights you have and what a lender can do if you break the agreement.
Credit File Conclusion
Finally, if you are not sure then always seek financial advice and beware of being drawn into a debt consolidation as it will turn an unsecured debt into a secured debt and you could risk losing your home if you are unable to keep up the payments. Look after your credit file – keep your credit report clean and you will always be able to get credit anytime and any where.
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Your thoughts, experiences and comments about your credit file are welcome below.