MONEY TALKS
Martin Lewis explains why credit score ‘isn’t real’ and shares ‘the holy trinity’ of measures lenders use to assess you
Find out what lenders really care about
MARTIN Lewis has explained why your credit score "isn't real" and shared "the holy trinity" of measures lenders use to assess you.
The famed money saving expert shared the surprising nugget on an episode of ITV's Martin Lewis Money Show Live.
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It came after an audience member asked: "What is the most important factor in determining your credit score?"
In response, Martin debunked the concept of a singular credit score, explaining that each person actually has multiple ratings.
He said: "You don't have a credit score. You don't have one.
"There is no single number that dictates if a lender will accept you.
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"Each individual lender scores you differently based on it own wish list - not just about risk but what is profitable as a customer."
He added that companies claiming to tell you your credit score are simply estimating how lenders may respond to your profile based on the measures available to them - which differ from agency to agency.
"The credit reference agencies market a credit scoring tool but it is just their idea, a rough example, of how a typical lender may look at you," he said.
"It isn't rock solid, it isn't official."
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In a response to another audience member, who was worried that his credit score had dropped, Martin said: "Do not sweat small changes in your credit score - it is just an indicator, it isn't real."
Instead, the 52-year-old recommended instead considering the "holy trinity" of measures that make you a favourable customer for lenders.
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The first measure lenders use is debt ratio, he explained.
This is simply the amount of debt you owe as a percentage of your annual income - with low debt and a high salary scoring the highest.
Martin explained: "Say you've only got a £10,000 credit card, you earn £40,000 - that is a 25 per cent debt ratio. Lower is better."
However, having no debt at all isn't good either, he added.
This is because the companies like to see that you are using it - and being able to pay it off.
He said: "If you have a debt ratio of under one percent, that can actually be negative, especially if you have very few debt products.
"One way round this is you get yourself a cashback credit card that you are spending every month but you're paying off in full."
The next measure, Martin explained, is credit utilisation - meaning the amount of your available debt that you actually use.
What is a credit score?
Your credit score is financial information used by lenders that informs them whether they should offer you a mortgage, loan, credit card or other form of credit.
There are three main credit reference agencies that compile your score: Experian, Equifax and TransUnion.
They pull together information from your financial history and how good you have been at repaying any credit borrowed.
Each of the three credit reference agencies has its own points system to base your score on.
Ratings usually range from poor to good, very good or excellent.
Having a good credit score is important if you're looking to take out a loan, mortgage or credit card.
Lenders use any data collected to decide whether they feel comfortable lending to you.
They also use your score to decide how much interest they will charge you over the course of the loan.
So someone with a £1,000 credit limit but who is only £100 in debt has a 10 per cent credit utilisation.
To boost this, he recommended using less of your overdraft limit - or even, while it may seen counterintuitive, increasing your credit.
But, he reassured viewers that a high credit utilisation is only really a problem when paired with a low debt ratio.
Moving on to the final measure, Martin explained that the more disposal income you have, the more attractive you will be to lenders.
However, aside from what he called the "big three", the financial expert also had one more measure to share.
He stressed that your credit file - a record of all your financial products - should be spick and span.
This means checking for mistakes - whether it's missing payments or even an incorrectly listed address - on a regular basis.
He said: "I want you to go through these reports, line by line, even small errors can mean rejection.
"If you've got an old mobile phone contract that's closed, but it's linked to the wrong address, that could kibosh a mortgage deal."
The three credit reference agencies, Equifax, Experian and Transunion, all hold separate credit files for each person.
Before you make an application, like for a mortgage, you should request a copy of your file from all three to iron out any mistakes.
How can I boost my credit score?
There are a number of free and cheap ways to help boost your credit score.
For example, getting on the electoral register proves who you are and where you live, meaning it's easier to get credit if you're on the list.
For Experian, being signed up to this can get you 50 points and it usually feeds through to your credit report in about a month.
It only takes a few minutes, and you can do it through your council's website.
You can sign up by registering to vote on Gov.UK.
How to get free debt help
There are several groups which can help you with your problem debts for free.
- Citizens Advice - 0800 144 8848 (England) / 0800 702 2020 (Wales)
- StepChange - 0800138 1111
- National Debtline - 0808 808 4000
- Debt Advice Foundation - 0800 043 4050
You can also find information about Debt Management Plans (DMP) and Individual Voluntary Agreements (IVA) by visiting MoneyHelper.org.uk or Gov.UK.
Speak to one of these organisations - don't be tempted to use a claims management firm.
They say they can write off lots of your debt in return for a large upfront fee.
But there are other options where you don't need to pay.
It's also vital that you don't make too many credit applications because lots of requests in a short period of time can be seen as a sign of financial distress.
Use a "soft-search" eligibility calculator to show how likely you are to be accepted - websites like MoneySavingExpert.com offer these.
You should always pay your bills on time. This is because late payments are also recorded in your file.
If you can, try to cut down your existing debt before applying for new credit, as lenders may be reluctant to lend to you if you already have a large amount of debt.
Using credit-builder credit cards for small, affordable purchases can show that you're a responsible spender, and it can improve your chances in the eyes of lenders.
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It's vital to ask yourself if you actually need to borrow before committing to a new credit card or personal loan.
If you cannot afford to pay off a current debt, you should avoid taking out any more debt at all costs.
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