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Welcome to Meren Talk's Your Money, the personal finance edition of Merin Talks Money.

In these bonus podcasts, we talk about the best strategies for making the most of your money.

I'm Merrin Sumset Web and with me senior reporter and Money Distilled offer John's Effect.

Hi John, Hi mel Right.

This week we are tackling a topic suggested by Tala, an apprentice here at Bloomberg who's been working on our team the last few months.

Tala is in her early twenties and says the surprisingly frequent topic among her friends is credit scores.

I don't really have a credit history yet, how would my credit score be determined?

What fuck does go into determining my credit score?

And how do I even check my credit score?

I've noticed that when I check my credit score on different websites, they vary.

Why is that I'm a bit lost by this when I literally do not remember ever talking about credit schools in my twenties.

John, No, but then we were plevileaged.

Because the nineties one a much better him for young people in general.

We don't have to worry about money really, because someone was so cheap.

Yeah, we could buy houses.

Yeah, we could buy hosts.

Aside the fact that the taller and everyonends are caring about credit school maybe they're looking out mortgages.

We'll talk about that later anyway.

So the question is how do credit schools work?

What are they?

Do I have one?

Do I have several?

How important is it?

What does it mean, what affects it the most?

And how do I make it good?

So lots of questions here, some of which John and I could answer alone, some of which we quite clearly couldn't.

So we've bought an expert to help uts go through all the basics of this subject, John Webb.

John is the senior consumer refairs manager at Experience.

John, thank you so much for joining us today.

Oh glad to join.

So right back in the beginning, what is a credit school?

There is not one credit score.

So your credit score is a number that is given to you by credit reference agency like Experience, and there are others as well.

Equifax and TransUnion are the other two.

So there's three main credit reference agencies, and we will all give you a number and it's a summary of the performance of your credit report.

So all the information that's on there, how you've managed credit in the past six years or so, and how much debt you are in, for example, right now, and the number gives you a good indication of how a lender will judge the information on your credit report when you apply for credit.

Okay, so this is a number.

What is a good number and what is a bad number?

Well, that's an interesting question because there is not one credit score.

Don't judge the numbers side by side.

Each credit reference agency will give you their own experience.

Is out of nine hundred and ninety nine, So we will give you a banding to say, you know, somewhere along the lines of you're somewhere in the good or very good or excellent category, for example, and your number just summarizes it gives you a really good indicator of where you sit on that banding.

And you know, that's how a lender will really look at that information say okay, you know what we do.

Think that's good and that's how we base that number.

Okay, So you're out of nine hundred and ninety nine.

Equifax and TransUnion are out of different numbers.

So Eqfacts I think is out of one thousand and TransUnion it's slightly lower out of seven hundred and ten.

Yeah, well, don't compare them side by side.

It's good to check them all and you can do it for free, so you know, please do, but don't compare them side by side and say, right, my experience score is this?

Why is my TransUnion score so low?

Just view them individually and see how you sit on the banding with those credit reference agencies.

Okay, And do any other organizations have credit scores for us?

I mean, for example, does my bank have a credit score for me?

Does my mortgage holder I have a credit score for me?

Are there other numbers around the place that aren't with these three main unions?

Yes?

Well, just to make this, you know, even easier for you, there are different numbers, but you will not ever see those numbers.

The only time the other number is generated for you is when you apply for something.

So you'll apply, they will check the information on your credit report plus your application form information, so really your affordability, salary, dependents, other expenses and so on, and perhaps if you bank with them already their own information and at that point you apply, they'll generate a score for you.

That's the score that determines do you get accepted or not?

What's the interest rate going to be?

What's the limit going to be?

But they don't tell you what that number is, so you know, you'll know you were good enough if you get accepted and get the good rates, you'll know you are borderline if maybe the interest rate goes up a bit at the end, or you don't quite get the limit you want.

Okay, all right, very useful, and I suppose the next obvious question to ask is how are those scores built.

What goes into the building of the score.

What are the agencies looking at?

The score is built on lender feedback, so they tell us the credit reference agencies what's important, so you know what's important in terms of your payment history if you've made them on time, or in terms of the amount of debt you have missed payments, court judgments.

There's lots of information that goes into calculating the score, but it's based primarily on how we work with and experience hundreds of lenders to figure out exactly what's important and how we build that score.

Okay, so your school will be good if you have borrowed money always paid it back on time effectively.

Yeah, A good track record of managing credit.

So you've had some sort of credit agreements in the past, you've paid them on time, and possibly in an ideal world, you have paid them off and closed them successfully.

And then that's kind of how you build your track record of managing credit well, and that leads to generally a good score.

There are other things that obviously impact it, so you know not just that, but how much current debt you are in, for example, will have a big influence.

If you've got credit cards, how much you're borrowing on those and how close you are to the limit and so on.

So your current debt levels have a big impact on your score as well.

But the history is really important.

Okay, I think there's an obvious question that comes out of that.

I want to ask the obvious question first and then move on to asking you what makes your credit rating bad.

The first question is if you are teller, for example, you asked us this question and you're in your early twenties and you have never borrowed money before, that means you don't have a credit score at all, or it means you have a bad credit score.

It's no, it doesn't necessarily mean you have a bad credit score, So they're kind of what we call a thin file, so where you just have very limited information, which means the lender can make very little judgment about how well you'll manage credit.

So you know, we always kind of talk then about the process of building your credit history, and it's kind of step by step process of getting some sort of information onto your credit report, managing it well through those credits, and then building it over time.

There's anything you can do to boost the law, I mean, it's something that obviously had about is make sure you're in the electoral register or the voters roll and exactly.

You know, because as far as the first thing you get crear that you don't like to be going for a mortgage, I mean to having a mobile phone contract, help all of these sorts of things.

Yeah, it does, actually, and it's a good point because in terms of building it, let's say, almost from scratch, getting on the electoral role is probably the first thing that I would suggest people do.

So wherever they can, of course, get registered on the electoral role.

That's your first bit.

Your next bit is having a bank account.

It doesn't matter if it's got an overdraft, but as long as you've got a bank account, it'll add some information on there, but don't have any problems with it if you can, so try not to go into unarranged borrowing and so on that can cause an issue.

And then the next stage would kind of be thinking about getting a credit card.

And that's because if you use that in the right way, and perhaps we'll talk about that in a moment, is they're quite easy to get and if you use them in the right way and pay them off in full, you don't pay the interest on it, and suddenly you've got a couple of accounts plus electoral role, you're building up some positive information on your credit reports.

That's a great way to start that process.

I think we had better go straight into what is using a credit card the right way?

I mean, I think we would think using a credit card the right way is buying stuff with it, you know, of not being any interest.

But you said that already.

Is there something else involved in the right way?

Well, it's just to do with the balance and how you use it on there.

And of course this is the right way for you know, me as a credit reference agency, let's say, because what we want to see and what a lender likes to see is a very low balance but an active account.

So the way to do that is spending a few pounds every month on something you would have bought anyway.

So try not to buy something that you wouldn't have wanted to buy normally.

That's how you kind of get into problems.

But spend it on something the food shop once a month, something like that, pay it off in full every month, so you don't pay the interest on it.

And so if you keep the balance slow, you keep it active, you don't pay the interest.

That's a great way to keep your credit card running.

Of course, there are people who use credit cards to do their normal spend on that's because they might get rewards points things like that on it, and there's nothing wrong with that.

But if you're spending a large amount or getting very close to the limit every month, then that can show on your credit report and that could affect your credit score.

So you probably want to avoid that right before you apply for something important.

That's interesting because this is another thing of read about, this idea of not wanting to do too many things, Like if you go to the personal finance websites, then people often talk about who you apply for the new buying account so you can get the sweach in bonuses every six months or something like that.

But then they sort of say they don't do that.

If you're about to apply for either a mortgage or a personal loan, the big condity, can you give us an idea of what the kind of lee we as and that sort of stuff?

Is there any sort of gay is there's a less less of a big deal and what's more important to avoid?

Yeah, so there's lots to that question.

But the first part is we generally say, because when you apply for credit, it pops up on your credit report and it could lower your credit score, and so we say keep those two a minimum where you can.

So probably a couple every few months is a good idea.

And so you know, that's why we say probably a couple of months, two three months before you apply for something bigger like the mortgage, for example, you want to avoid applying for other types of credit just so you don't have those applications pop on.

But the other part to your question is if you're applying for something that you know has a value to it.

So let's say you're taking out a loan or potentially even using buy now Pay later, or something that would add a balance of debt to your credit report.

You again might want to avoid that before applying for something big, just because of that will then impact into your affordability how much you're currently borrowing those kinds of things.

Yeah, one quick thing that you mentioned by an ope later, what is this theatis of that at the moment?

And because I've not stayed fully abreast of this, and I remember the sort of clown that stale stuff wasn't really been clipt an eye And how's that change in or what's going on with that?

Yeah, that's an interesting question.

But that there are by now pay later lenders who are sharing with credit reference agencies, now Klana being one of them.

They share their information with us, and some of the others do with the other credit reference agencies as well.

It doesn't factor into the credit score we give you yet because the sharing is so new, and there is regulation that is kind of proposed and coming down the line, which may mean that possibly next year twenty twenty six, they will be regulated to share or by now pay later accounts with credit reference agencies, So that might come down the line.

But it may be that if you use certain ones they will share with a credit reference agency at the moment, so you'll see those accounts pop onto your credit report.

So let's talk about what makes your credit reading bad.

What are the things that actively make it bad?

I mean, I'm assuming things like coming account of good judgment against you, a bankruptcy and iva, that kind of thing.

But is there anything else that will actively make it bad that might not be immediately obvious to people like that.

Yeah, of course, so these obviously are the things to try and avoid where possible.

We've talked about applying for credits, so you know, lots of applications in a short space of time, that's likely to drop your credit score if you've got lots of new accounts as well, so we calculate the average age of your accounts.

So really what we're saying is long running accounts are good.

Loads of new accounts can kind of impact your credit score quite significantly, especially if they're under a year old.

And then the next part is payment history.

It's a really big part of your score, so missed payments, even one of them, could impact your credit score by quite a lot.

So you know, really important to have the direct debits set up, make sure things are paid on time, even the mobile phone contract, you know, the smaller bills that you think, actually, you know what, that's not going to have much of an impact.

It will still impact your credit report if you miss it.

Does that include your electricity bill and your water bill and all that sort of thing.

Yes, they are shared with credit reference agencies as well, so you know, if you're missing those payments and also incurring debt for missing those payments, yes, that will show on the credit report as well.

You talked about county court judgments, so court judgments, anything to do with insolvency like an IVA or bankruptcy will obviously have a significant impact on your credit score.

But the biggest thing that actually does have an impact on your score is what we call a defaulted account.

So that's an account where you haven't paid it in probably somewhere around three to six months, and the lender has then closed the account with an outstanding set as a default stays on your report for six years from that point, and that has a really big impact on getting credit.

So, you know, my biggest advice actually in that scenario is if you're missing payments or you're going to miss payments and you're in that place where you will go on the road to potentially a default is speak to the lender straight away, try and set some sort of payment arrangement up that at least stops it going to a default.

Or as well as that, speak to a free debt advice provider, your step change pay plan, someone like that who can really help sort out you know, your kind of finances and budget and so on, and find the right solution for you.

Let's say I'm playing for a mortgage and my credit score with experience with all of them is not excellent but very good.

What's the difference in the interest rate that I'm likely to get offered for a mortgage?

That's a that's a very difficult question to answer, so well, let's don't focus on that too much.

And the reason I say that is, like I explained earlier, what happens is the lender doesn't see the score we give you.

They see the information on the credit report, but they use that in conjunction with that your affordability information.

So you might have a huge deposit.

I'm sure you've been saving for a long time, so you've got that.

Your salary is great, your other expenses are minimal, and that you know, together they calculate that and give you their own score, and that might mean that you get, you know, a very very good interest rate.

If there is an issue with affordability or with negative information on your credit report, that's where you might start to see the interest rate is getting a little bit higher when you apply.

But that's down to each individual lender, how they judge it, how they you know, assess that score, and you know what rate they give you.

At the end, you're.

Saying that there may be no difference between the interest rate I'm offered if I'm very good or excellence.

Are so subjective, isn't it?

It's well, I wouldn't say subjective because it's slightly so I guess it's scientific in the sense that you know, there's just it's a lot of data to look at and judge, but each lender will be slightly different in how they assess it.

So I don't want people to get hung up on the fact that they're twelve points away from being in the excellent category, because that will have very minimal impact on, you know, how the lender judges the information.

It's really about making sure your credit reports in a good place and then obviously they factor in the other information as well.

Yeah, it's a bit late for that, John Binnis, because we had target driven people and John and now the second we finish here will be going online and we'll be trying to find out what our score is at each one if where it doesn't matter how far up we are off Eklanent, We're both going for it and it will be a competition.

I'm going to be age long before right now.

Well, absolutely absolutely, he's already.

I don't know.

We'll be finding out in the next ten minutes.

And the all other thing I wanted to Johin was see, if you do have buyed credit, how do you repeal that?

Like say, if i'd I don't know, a dodgy kind of like yeah, you know in the twenties, but no, you're a responsible adults.

Should you start with?

Well, look, the good news I'd start with is that generally information on your report stays for six years, so there's always light at the end of the tunnel.

If there's something negative, the thing I would say is key is just keeping on tracks.

So you might have some negative stuff, it's about okay, can that negative stuff be brought up to date?

If you've been missing payments and kind of turn that into a positive, keep that running well, and depending on what it is, it might mean that you focus on other accounts.

So those basics that we talked about earlier, you know, having the bank account, maybe having the credit card, and just focusing on those and keeping them running well, on time, paid, on time, balance is low, and then at some point the other negative information might drop off the report and it has less of a negative impact on your score over time.

So it's kind of just focusing on doing good things while you can and with what you can, and then it will start to improve over time.

The other thing I would say, as well, as you know kind of when we're talking about the negative bit well and the applying for credit process is actually there are lots of services available to search for credits or primarily credit cards, loans, car finance, and in a way for mortgages as well.

But use comparison sites and eligibility services to check for credits or we've got one.

There are lots of them out there, and the reason you use those is they don't impact your credit score when you do the search.

It's a bit like searching for house insurance online.

Their soft searches don't impact your credit score, but they will give you a very good idea of who will accept you and what kind of deals you can get.

And you could even get pre approved as well, which is always a delight to know before you actually apply, so you know if anyone does, if anyone's looking for credit, even if they're in a good place or they have negative information, it's a great place to do your kind of credit research.

I know you said about ADMIN earlier.

It's more ADMIN, but it means that you know, you get a really good idea of who you should approach, rather than just applying to anyone who you've seen and possibly getting refused.

If I can look up my credit score this easily, can other people look at my credit score?

No?

Why not?

So when you say open an account with a credit reference agency, we go through lots of checks to make sure it's you that is setting up an account.

To check your credit report and score, we verify information across public record information like electoral role account information to verify that it's definitely you and if there's any issues with that.

We also go through further checks to check your ID documents and possibly bills or statements as well to make sure that we do not show anyone else your information.

Okay, good, I'm sttle nervous about my electricity bill now and everyone else looking it up, so I think we're all good.

John, thank you so much for being with us today.

We really appreciate it.

Not glad to be here.

Yes, thank you.

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