Credit ratings UK

A credit rating, also known as a credit score, is the calculated estimation of a business owner’s general creditworthiness — usually, this is a broad estimation, but it can also be applied to a specific financial obligation. This score tells lenders about how you’ve handled money in the past; the higher your credit score, the more likely it is that you will secure a loan, and at more favourable rates.

Who calculates credit ratings?

Credit ratings are calculated by the three main credit rating agencies or credit reporting agencies (CRA): Experian, Equifax, and TransUnion using a form of Fair Isaac Corporation (FICO) credit scoring. Each separate bureau collects information from different creditors and enters this data into an algorithm that, in turn, is used to calculate your credit score. Each CRA receives different data points and deploys a unique rating scale to come up with your score, hence your credit rating may differ slightly between different agencies. This is different to Fitch ratings, which rate the viability of investments relative to the likelihood of default in the US.

How does a credit rating work?

Each time you apply for credit, whether it is a short-term business loan, a commercial mortgage, credit card, mobile phone contract, or a new energy provider your credit rating will be updated. When a lender is deciding on your credit application, they will take into account your history of borrowing, active credit facilities, and your income. As a first step, they will look at your credit report, your application form, and if you happen to be an existing customer, your account details and previous transactions with the lender.

What affects my credit rating?

You will never know exactly how a CRA calculates its score, but the following activities have a significant impact on your rating.

• Receiving a CCJ ( County Court Judgement) or a court summons for debt collections will reduce your score significantly. There is still a chance to get a business loan even if you have a bad credit score

• Defaulting on your credit agreements is one of the main causes of credit rating deterioration, and can affect your score for up to six years

• Missed or late payments can be bad for your credit rating; even one missed repayment can damage your score

• Going over your credit limit will result in a CRA penalty, especially if you have used more than 90% of your credit limit. The good news is that you will be rewarded if you manage to stay under your limit. This might seem counterintuitive but having too few credit transactions can negatively impact your credit rating, the CRAs want proof that you can make payments with multiple lines of credit over the long term

• If you have had no account charges for six months this can impact your credit rating. The reason for this is lenders want to see demonstrable consistency and stability

• If you have more than £15k in credit card debt this will be viewed as excessive and most lenders will determine that issuing additional debt is too risky

• If you clear your credit card debt each month, this will have a positive impact on your credit rating

• By keeping the same credit card for over five years you will demonstrate the kind of consistency that lenders are looking for

• Finally, signing up for the electoral register helps CRAs verify your identity

What is a good credit rating?

Lenders want to know if you can be trusted to repay a loan, so your credit rating will give them information to make a decision. A CRA will plug in key details such as how long your business has been trading, your financial history, and credit utilisation rate, i.e how much of your credit card limit you’ve used in the past. A low credit utilisation rate tells lenders that you only use a small fraction of the credit that you can avail of and this counts positively towards your credit rating.

For Experian’s business brackets, their range goes from 0-1 for an imminently failing company up to 91-100 for a very low-risk company. The majority of companies are between 50 to 100 (below average risk) to very low risk. If your company has a credit score of less than 25 you will need to turn your score around before applying for a business loan, at least if you expect favourable terms and credit limit sizes.

How can I improve my credit rating?

The first step to potentially improving your credit score is by checking your credit report for free from each of the above-listed rating agencies. This will also give you advice regarding areas for improvement. Once you have a copy of your credit report, you should check for errors and mistakes. With a fine toothcomb, you will need to go through all of the lending transactions in your name to ensure their accuracy. Even something as simple as a credit card that you didn’t apply for can have an impact, so check the report carefully. In addition, see if your address is up to date as this can also negatively affect your overall score. 

Pay your bills on time

From today onwards, if you are looking to improve your credit rating, you will need to pay off all of your regular or outstanding bills on time. Remember that not all bills count towards your credit score, but you can easily see which ones do, once you have your credit report to hand. If you have recently missed a payment, or expect that you will miss one in the future, it’s worth contacting your provider to inform them about why you have missed a payment and you should offer to pay it immediately. If you clear the payment before they have registered it as a missed payment, you might avoid a mark against your credit rating. 

Avoid multiple loan applications

If you have been denied an application for a loan, you should never apply twice. Multiple applications in a short period of time can have a negative effect on your score. It’s recommended that you wait for at least six months before reapplying. 

It takes two, baby

Many married or cohabiting couples share a joint account. This is fine, of course, unless your partner has a less-than-perfect rating, in which case your score could be impacted too. If you both agree to get a copy of your credit reports, you could see where both of your strengths and weaknesses lie, and, in some cases, it might be better to go it alone, when it comes to joint accounts. 

Paying rent on time

Demonstrating that you pay rent monthly, on time, and in full can have a positive influence on your credit rating, and this could mean that you don’t need to apply for an additional credit facility. In the UK, landlords previously did not provide rent payment information to rating agencies, however, presently, private landlords can enter this information, which can support your credit rating. 

Open banking data

UK- regulated banks have to share information about your current account transactions if you request it.  This is called open banking data and will count towards your credit rating. If a lender has visibility into your ingoing and outgoings, they will have much more information at their disposal to assess whether it is risky or not to lend to you. If you have a consistent monthly income and your bills are paid consistently over the long term, a lender will assume that repaying a loan won’t pose any problems.

Credit card

Another option for individuals or businesses with no credit history is to take out a credit builder credit card. These cards might suit first-timers who have no experience with loans or credit cards. However, bear in mind that the card limits on these cards are low and they carry high interest rates. The reason for this is that your credit file information is limited or negative, so the lender charges more to reflect the higher level of credit risk. Yet, by using these cards over a long period, with the balance paid in full at the end of each month, you can build a positive credit rating, and in turn, you will be able to get lower interest rate credit cards and business loans. Bear in mind that you might have to pay up to 30% APR, so it’s important to pay off the balance at the end of the month.