People have become increasingly dependent on loans for Car Finance, Mortgages or other reasons.
Therefore, it is crucial that you understand personal credit reports and your rating / score.
There are three credit reference agencies (in the UK) in total who hold a profile for you; these are Equifax PLC, CallCredit and Experian.
When you make an application for a loan, car finance or mortgage, the lender will use your credit score to make a quick yes / no decision.
This same decision can also be made by simply viewing your credit report, the reason they will look at your score is to make the decision making easier and less subjective.
There are many factors that are taken into consideration by the underwriters before granting the customer with a final decision.
The calculation is broken down in to five major categories with different levels of importance.
These categories are payment history, amount owed, Length of credit history, new credit and type of credit used.
No one area or incident determines your score; all of these categories are taken into account.
The largest component is the payment history category as this reviews how well you have met your prior obligations.
It also looks for problems in your payment history for example Bankruptcy, collections and delinquency.
They will look at the size of these problems, how long it took for the problems to be resolved and the length of time since the problems appeared.
The more problems you have had the weaker your credit score will be.
The second factor is the amount that you owe currently to lenders.
This category focuses on how much debt you are currently in, but also looks at the number of accounts that you hold along with what specific types of accounts they are.
This area is focused on your present financial situation.
If you have a large amount of debt from different sources this will have an adverse effect on your credit score.
All of the other categories (length of credit history, new credit and type of credit used) are fairly straightforward.
The longer you have had a good credit history for, the better.
For example, a customer who had never missed a payment over the last fifteen years would be safer than one who had been on time with their payments for the last two years.
Also, If you apply for credit a lot the lender may get the impression that you are under some sort of financial pressure that is causing you to do this, therefore every time you apply for credit your score gets decreased slightly.
As well as this they would find a person less risky if they had one credit card rather than a person who had ten credit cards, the more credit cards you own the lower your credit score will be.
There are different types of lenders, prime and sub prime.
This means that if you have bad credit there is still a chance for you to obtain finance.
Prime lenders focus on top grade credit scores whilst Sub prime lenders on the other hand will look at people with not so good scores, but as a result of them having a bad credit rating they will be offered high rates as it is 'risky' to lend to these sorts of customers.
Although the sub prime lenders grant finance to customers with a bad credit history they will not lend to everyone, If your credit score is really low you may not be able to obtain finance.
All applications for information on credit are treated with strict confidentiality, there for no explanation will be given to anyone who asks the reason behind any credit decision.
If you have been declined by any prime/subprime lender you can purchase a copy of your credit profile from the credit reference agencies (Equifax PLC, Call Credit and Experian) for a small fee.
Your credit status can be built up with well managed accounts ie phone bills, credit cards etc, which will increase your credit score.
Increasing your chances of further credit.
At the same time credit scores can drop, with poor account management ie late payments, non payments.
These errors will show as marks on your credit profile reducing your chances of obtaining further credit.
So in summary your credit status is decided by your history of managing your money and your ability to make regular payments.
The better you are at this, the better your credit status will be.