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Credit Files: The Basics

Everything you need to know and more

Page Summary :

What is a Credit File, how does it really work, and why it's so important to try to keep a clean one. This page goes into plenty of detail.


  • This page and the whole Credit File Help section contains a great deal of information because your Credit File is extremely important
  • The content cannot therefore be shortened into a simple 500 word article.

I don't want to lecture anyone but unless you're willing to put in the work to properly understand Credit Files it's odds-on your personal credit rating will never be as strong or as clean as it could be.....

What is a Credit File - Why it's so important
Most people have heard of Credit Files but only a few really understand how they work and how important they are. Important is the operative word because put simply -
apart from your salary your credit file
is the most important aspect of your financial life
This is because a good credit rating (often called a clean rating) gives you financial options, whether you choose to use them or not.

So if you ever want to apply for a loan, credit card, mortgage, open a bank account or even a mobile phone contract it's never going to be a problem if you have a good credit rating.

Conversely, if you have a bad rating almost every financial door will be slammed in your face and that can often cause insurmountable problems in your life. Or, if any financial doors are opened you can expect to pay extortionate rates of interest as you'll be classed as a high-risk borrower.

Some employers now will now check the credit file of job applicants

An increasing number of employees and other organisations now run personal credit checks if you apply for a job. And depending on what they find this can be good or bad news.

Having a clean Credit File is a great way to save money
Around 80% of loans and at least 50% of Credit Cards offer interest rates at different levels according to the person's credit rating. Take a personal loan as an example -
  • Excellent credit rating - the interest rate on the loan will be 8.9%
  • Average credit rating - interest rate of 11.9%
  • Below average rating - interest rate of 15.9%
  • Bad credit rating - the application will probably be rejected

But many people don't want loans and don't need any more credit cards so might feel there's little cause for concern if their rating is negative. However, a mortgage is also a loan and many readers will either have one or will be looking for one at some time in the future.

So if you want the best mortgage deal, the one with the most competitive interest rate, it's going to be hard to qualify unless your credit file is squeaky clean. Plus, what about remortgaging into a cheaper deal? Again, that will only be possible if your credit file is in tip-top condition.

Summary - A clean credit rating is an important financial foundation and is the key to saving money on all personal finance products. It's therefore no surprise that in our Top 10 Secrets to Personal Finance, this is Secret number 7 -

"Protect your Credit File with your life" - More details

What information goes into a Credit File - 3 main components

  1. Your personal details - Name, date of birth, address and past address etc
  2. A list of your present financial commitments that involve credit - Details of your mortgage, credit cards, loans, bank accounts and mobile phone contracts etc
  3. Your historical payment records - How have you been paying your bills, on time, late, never etc. Details of any defaults or CCJs (County Court Judgments) are also noted

I expand in far more detail on the above 3 points throughout this article. But leaving personal details aside for the moment here's a diagram that does a good job of indicating what type of financial information is considered and in what percentages -

Who collects this information
Your personal information is collected by 2 Credit Reporting Agencies (CRAs) -
  1. Experian
  2. Equifax
The CRAs are all commercial businesses out to make a profit (via selling our information). They are not government agencies nor are they owned or operated by the banks and finance firms.

The job of a CRA is to collect and collate both personal and financial data and it's important to understand they don't produce a so-called credit score. Instead they provide the raw data and the banks and finance firms (who purchase it) grade it using their own in-house credit scoring programs.

The difference between a Credit File and a Credit Rating
  • Credit File - Holds all your personal and financial information - that's all
  • Credit Rating - The information from your credit file is then used to produce a credit rating
However, just to confuse matters in the UK we don't get a credit rating like they do in America. Americans are allowed to know what's called their FICO score - 300 being bad, 850 being excellent - but the company behind FICO doesn't operate in the UK.

As I indicated above it's the bank or company we apply to for credit that scores our data. However, we are not privy to this information and anyway each bank will score differently. It's therefore possible for Barclays to give a good score whereas Natwest's might be far lower.

Watch out CRA produced 'Credit Scores'

Be attentive because the CRAs love to market services and features that the average person doesn't need.

For example, all of them try hard to sell you an (estimated) credit score but this is worthless because it's not how these agencies interpret your data - it's how a potential lender does.

A far cheaper option (it's free) is for you to estimate your own credit score which takes less than 5 minutes.

Where to get hold of your Credit File
What a Credit File looks like - Downloadable example
Here is a PDF example of a credit file. Note, that this is from Experian, and both those from Equifax and Call Credit will look slightly different.

Tip - Dump Adobe's PDF Reader software - Here's a far better alternative

If like me you dislike Adobe's bloatware (Wikipedia definition) PDF software then delete it and use the excellent (and free) FoxIt PDF reader instead. It's excellent and really quick.

What doesn't affect your credit rating
Not only does the information below not affect your credit rating, it doesn't even appear on your file (apart from whether you're male or female).
  • Race - definitely not taken into account

  • Sex - There might be a slight advantage of male over female only because historically men have been the breadwinner

  • Salary - No, definitely not. This often seems hard to believe but your credit report doesn't take into account your salary so somebody who earns £10,000 a year is at no disadvantage to someone who earns £1million+

  • Job - Again this is not considered, so it's possible for somebody who's unemployed to have an excellent credit rating whereas a Doctor or Accountant has a dreadful one (chronic late payer for example)

  • Value of your property - Not taken into account so non-property owners are not at any disadvantage

  • Assets - You might own little, or your assets might be worth £1million. Whatever the case they're not taken into account

  • Family connections - Just because your mother, brother, aunt and even spouse have atrocious credit ratings these have no bearing on yours. This assumes that you don't share any joint accounts with them

  • Who you live with - If you live in a property with some friends/family all who have bad credit ratings you won't be 'associated' with them because you live under the same roof

  • Medical records - No

  • Criminal record - Nope

  • Religion or faith - No
What does affect your credit rating
Behind the scenes Credit scoring is a complex business and all sorts of calculations and algorithms are used. But as complex as the workings might be they all rely on common sense as you will see from the information below.

Note. I have classed the information below as either high importance, medium importance or low importance in relation to the effect they have on your credit file.

Electoral Roll - Medium importance
If you're going to lend money to someone common sense suggests you want to do business with people who live stable lives and can easily prove where they live. One clue of this is to check if the person is registered to vote, which is also called being on the electoral roll.

Of course, just because you're not registered to vote doesn't mean you're a bad risk and vice versa. However, in the black and white world of credit scoring you can only obtain a good rating, or improve one, if you're registered to vote.

The age of the credit file - Medium importance
Note, not your age - the age of your credit file and the older it is the stronger your credit rating.

For example if you were a lender would you rather lend to someone where you can see their last 10 years of borrowing history or someone where you can only see the last 12 months?

In order to work out the age of your credit file the computer will look at all your accounts (listed on your credit file) and find the one that has the oldest date. So if you've had a Barclaycard since 1990 and the year is 2010 your credit rating is 20 years old.

However, if you also have another credit card, say a Natwest Visa opened 10 years ago, the 2 dates will be averaged so making your credit rating 15 years old.

Important - Don't close dormant accounts

As the age of your credit file is important you shouldn't close an old but good account which is listed on your file. Perhaps for example there's an old building society account opened 15 years ago that still has £0.87 left in it.

Sadly most financial commentators miss this point, as they all blindly suggest it's important to close unused accounts.

But this information is 100% wrong because as you've seen your credit rating's Date of Birth is important. And all you do by closing old accounts is to reduce your credit file's date of birth and that in turn will lead to a drop in your rating.

My advice is therefore simple - Always try to keep old financial accounts open, even if you don't use them.

Credit Capacity - The percentage of available credit you're using - High importance
Another bit of awful credit file advice you hear from almost every financial commentator is -

you must close down unused credit accounts that you're not using

Again, they all state that this step is guaranteed to improve your credit rating. But sorry, this is the worst piece of credit file advice anyone can offer as closing down unused lines of credit will 100% lower your credit score. I prove this below.

First, what do I mean by 'unused lines of credit'?

Say for example you have 2 credit cards each with a £1,000 spending limit, sometimes called credit limit. If you don't use the cards you have a £2,000 line of unused credit. But if you then spend £1,000 your unused line of credit is now £1,000.

So here's the proof of why cancelling unused lines of credit will seriously knock your credit rating. It's all to do with what's called your credit capacity -

  • Bob has 3 credit cards each with a credit limit of £5,000
  • However, he only uses one card which has a negative balance of £4,000
  • Bob's total credit line (across all 3 cards) is £15,000 and he's using £4,000 of this
  • Or to put it another way he's using 27% of his available credit capacity

  • Sally also has 3 credit cards each with a £5,000 limit
  • But she's gone crazy and used up £14,000
  • Hence she's using 93% of her available credit line

Lenders take these percentages seriously as a high percentage usually means there's a strong possibility the person is struggling with debt.

Who would you rather lend to if you were a bank officer? John, whose financial records look like he's far from financially overstretched (only using 27% of his available credit), or Sally who's almost at her limit (93%). Would you not think that Sally looks a little desperate if she comes asking to borrow more money?

Yet again common sense suggests John is by far the better financial risk.

However, sadly for John he's read the usual rubbish that says 'if you want a better credit rating you must cancel any unused Credit Cards'. So he does, cancelling the 2 that are not being used. But then look what happens -

  • When he had 3 credit cards his total credit line was £15,000 and he was using £4,000 or 27%
  • Now his credit line has shrunk overnight to £5,000 which means his percentage use of available credit has shot up to 80%
  • He's now little different to Sally, and believe me his credit rating will take a big hit

Summary - Having unused and untapped credit is one of the foundations to getting a great credit rating, so ignore anyone who tells you otherwise.

What's the optimum percentage to have

10% or lower which might be hard to achieve for some. What is interesting though is a high percentage doesn't matter too much if you're not looking to obtain any more credit. For example -

  • You might at present be using 75% of your available credit line
  • But this won't matter if you don't need to apply for a new credit card, loan or even refinance your mortgage over the next year
  • Hopefully you'll have a plan in place to repay your debts and so the negative news will slowly work its way off your credit file

In summary: Under 10% is the best and I would think up to 30% wouldn't be a problem. Towards 50% and above, that's where the real damage starts to be done.

A simple way to instantly reduce your percentage capacity

Credit Card companies are ever greedy to lend more money and in my experience, assuming your credit rating is fine, they'll normally oblige should you ask for more.

Assume your current limit is £5,000 and you have a debit balance of £2,500. Call them up and ask them to raise it to £7,500, the worst they can say is no. What this will do is instantly reduce your capacity percentage, for example -

  • Your current percentage is 50%
  • But if your cards limit is increased to £7,500 the percentage immediately drops to a far better looking 33%
  • You can also try to get the percentage down even further by applying for another credit card
  • Most cards seem to offer a starting limit of £2,000 - £2,500 which would mean your percentage drops to around 25%

All this has been achieved without ever borrowing another penny. However, you must be financially disciplined and plan not to use the cards otherwise the whole exercise will have been a disaster as you take on more debt.

If this strategy interests you, then you must read the next point as it's highly relevant.

How many times you apply for credit (over a period of time) - Low to medium importance
Imagine you were in the school playground and saw a fellow pupil (who you don't know too well) asking every kid if he could borrow £2.

Everyone turned him down and now he approaches you. Would you lend him the money or would you think there's perhaps a clue (about his potential credit worthiness) because everyone else has turned him down?

It's no different in the credit scoring world. Whenever you apply for credit, regardless of whether you're accepted or declined, a small mark is entered on your credit file, which will look like this -

  • On 19th January 2010 Barclays Bank downloaded this credit file

Note the data entry won't say whether Barclays accepted or declined you.

These are called 'credit searches' or a 'credit inquiry' and too many over a short period of time is not good news. This is because the probabilities suggest the person is desperate and is not only applying everywhere for new credit but seems to be turned down wherever he goes. This is how their credit file might look -

  • On 19th January Barclays Bank downloaded this credit file
  • On 23rd January Natwest downloaded this credit file
  • On 28th January Capital One Credit Cards downloaded this credit file
  • On 3rd February Tesco Finance downloaded this credit file

The way to make sure this doesn't happen to you is to -

  1. Only apply for credit when you're pretty sure it will be granted. For example if your current rating is suspect it will only be made worse by applying for 0% Balance Credit Cards (these are normally only issued to people with excellent credit files)
  2. Stop applying for credit if you get refused twice within a month, and then try to work out why you were refused

    As a general rule of thumb try not to get more than 3-4 credit searches over a 12-month period.

    Who you currently have credit accounts with - Medium importance
    The quality of your present lenders are also considered. For example, banks, building societies and most credit card companies are viewed as blue-chip lenders, the best of the best.

    But finance companies are viewed as suspect. Why is this and what is a finance company -

    • Finance company - a financial institution (often affiliated with a holding company or manufacturer) that makes loans to individuals or businesses

    A good example will be the 0% financing options many of the large retailers offer, the Sofa companies that are always advertising on the telly are a classic example. These companies themselves are not finance firms so when a customer signs an loan agreement it will be with a separate finance company.

    Finance firms also specialise in offering small loans to the less well off, and many people view them as legal loan sharks often charging interest rates into the hundreds of percent.

    Having an account with a finance firm is usually negative for your credit rating

    If your credit rating is currently OK and you're looking to improve it I wouldn't advise you open an account with a finance company. So try not to buy any furniture or a new flat screen TV on a 0% finance deal or one which charges interest.

    Yes, it might make financial sense (spreading the payments over 6-36 months) but realise this also comes with a hidden price - negatively effecting your credit rating.

    But if your credit rating is currently dreadful I would advise you try to get credit via a finance firm. I explain more about this on the how to repair bad credit page.

    How to work out whether you're dealing with a finance company

    It's easy, use this rule -

    • If you haven't heard of the lender before, ie they're not a big brand household name like Barclays or Natwest, then there is a 90% chance you're dealing with a finance company.
    Paying your bills on time - High importance
    As a lender you'd far rather do business with someone who makes the monthly repayment on time, rather than someone who has a habit of always paying late, if at all. More common sense.

    So your payment history is taken into account. Every month you make a repayment on time for any credit account (credit card, loan, mobile phone bill etc) a small positive tick is entered on to your credit file. Conversely every month you make a late payment (even by 1 day) a negative tick is entered.

    Most people make the occasional late payment which doesn't really matter. However, be late with 2 or more repayments over a 12 month period and your credit rating will take a hit.

    Also realise that your payment dates are graded so the later they are made the more negative weight they'll carry, for example -

    • Late by 1-30 days = Slightly negative effect but if you miss one payment every year or so the effect on your credit file will be negligible (if at all)
    • Late by 30 - 60 days - More serious and this will have a much larger negative effect
    • Late by 60 - 90 days - Getting serious, this will punch a nasty hole in your credit rating
    • And so on
    Summary - My advice is simple, when it comes to making monthly repayments - don't play games with the date.

    Some people think it's clever to wait until the last possible day to pay (or the day before) but to me the more intelligent strategy is to pay 2 weeks in advance.

    Then check a week later to see if your account has been credited. Doing it this way means if there's a problem it can be sorted out in time and you'll be guaranteed to get one of those nice 'repaid on time' positive ticks on your credit file.

    See number 8 of this site's 10 Secrets to Good Personal Finance -

    10-30 minutes a week - all you need to be financially organised

    Other factors that count towards granting of Credit
    Application Score
    An application score relates to your personal information as filled out on an application form. For example, if you apply for a credit card or loan you'll have to fill in plenty of information, such as -
    • Name, address, sex, age etc
    • Address and how long you've lived there, also whether you own the property or rent
    • Personal income and often your job and employer

    It's quite easy to get refused credit even if you have an excellent credit rating because you fail on your application score. For example -

    • If you apply for a credit card the company might automatically reject anyone who earns less than £30,000 a year
    • Put in your salary of £25k and the decision will always be no even if you have the cleanest credit file on record

    This is why it's important to study the application process because many will state clearly any stipulations such as salary greater than £x and must be a homeowner etc.

    You might be a no-good deadbeat!
    No, that's not an insult it's actually good news in the personal finance world.

    Credit Card companies call some of their clients 'deadbeats' because they don't earn them a profit! These customers use their cards every month and then always repay the debt in full, hence paying no interest.

    So it's always possible, especially when applying for a credit card, to be refused even though your credit file is in excellent shape. The credit card company will have worked out via your past repayment history that you have a high chance of being a non-profitable customer, ie a deadbeat.

    Internal Behaviour Score
    Your Behaviour Score is interesting - it's a credit score relating to how you've conducted your business with an individual lender.

    For example, say you've had a Barclaycard for the last 5 years. Barclaycard will have built up their own internal credit profile of you, points of interest such as -

    • You average utilisation - the percentage of your credit line used (see above)
    • Your payment record - are you always on time, often late, chronic late-payer
    • How much you normally pay (monthly) as a percentage of your overall debt - the balance in full, the majority, usually the minimum balance etc
    • Whether you've responded to special offers - if they've bombarded you with other deals such as loans or insurance - have you taken the bait
    • If your credit limit has been increased, whether you've used it or not, and how quickly
    • And many more similar bits of financial and personal data

    A good behaviour score with an individual lender or bank is great to have especially if your overall credit file is not so strong.

    For example, if your current rating is bad (due to a series of late mortgage payments) and you have a credit card with Natwest they are the first ones to approach should you need any more credit, perhaps a personal loan.

    This makes sense because Natwest knows you better than a bank where you have no previous financial history. Natwest, assuming you've run your accounts with them professionally, might pull your credit file and say -

    "Hmmm, from the information contained in this credit file the person looks a bit suspect"

    However, when they check your internal behaviour score they might say -

    "wait a minute, he might be a risk as per his official credit file but according to our own internal records this person has been a model customer for the last 24 months - credit is therefore granted!"

    I talk more about this concept on the Emergency Credit Improvement page and it highlights the importance of building good relationships with your bank/credit card company etc.

    As you will have learnt on this page, a credit file and in turn a credit rating is not hard to understand and most of it is based on common sense. However, there are plenty of nuances and tricks that you must know to get the best rating possible.

    Finally, don't forget why having and keeping a clean credit file is so important - it offers you financial options whether you choose to use them or not.

    FREE REPORT - How to Audit Your Credit File
    With errors your rating will suffer
    4 simple steps to a clean up mistakes
    Don't discount the importance of your credit file - it's absolutely critical.....
    Click here for the FREE Credit File report
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    • One secret to improving a credit rating is to improve your repayment history
    • Certain Credit Cards can used, most can qualify even if your credit rating is bad
    • Use them for small monthly purchases, then repay that month
    • The strategy works wonders - Read more

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