How do credit checks/histories work in the UK?

October 20, 2008 7:01 AM

UK Credit Reports / Histories: I've seen loads of posts referring to the USA system of credit scores, credit histories, etc. but never seen anyone refer to an equivalent UK system. Presumably we have one, but how does it work?

So far in my life I've been lucky, and never taken a bank loan or had a credit card. This is great, but means I have no clue how the system works and I'm about to leave student life for the real world.

In my bank the other day, the manager tried to persuade me to sign up for a credit card (which I later found she gets commission for) and mentioned that it's useful to "build up credit". I assume she's talking about building up my credit rating so I can get loans more easily in the future, which I thought was just a US thing. Most importantly, I'm reluctant to take advice from someone who's getting paid to sell a credit card to me. I'd much rather ask... um... a bunch of strangers on the internet. Hmmm.

So:
Do I, having lived my whole life in the UK and never used credit, have a credit "score" like I've read about for the USA? If so, how do I find out what it is?

Is having a credit card and not using it (I'm terrified of spending money I don't have) really better for me than not having a credit card AND not having and debts?

Why, when performing credit checks, do companies always check my current and past addresses? I've been told that putting a student hall as my address will automatically get my phone contract refused so I put my parents' address and got through. Given that I haven't lived anywhere for longer than a year for nearly seven years now, why is my address more important than my name and bank account?

posted by metaBugs to work & money (7 comments total)

Very easily googleable. Experian and Equifax are the two big credit rating agencies in the UK.

If you have never used any credit at all (not even an overdraft), then you will essentially be an unknown to credit rating companies, although other things (like missing a gas bill for example) can negatively affect your credit rating.

Having a credit card and using it as you would cash (i.e. paying the balance in full every month, not carrying a balance, not spending money you don't have) would allow you to build a record of good credit behaviour, which will potentially give you more favourable terms for when you do need to borrow money in the future (for example a mortgage).

Address-wise, credit ratings are tied to addresses as this is how they track people through the system. Halls have wacky credit ratings because so many young people in all sorts of stages of debt go through year-to-year. I used my parent's address for most of the time I was at Uni, then put my own on when I moved away for my first job.

If you're not comfortable with any form of debt, don't take any. But if you foresee a time when having a form of debt (mortgage, car loan etc) may be something you want to do, then it is a good idea to establish a history of good credit, which you can do with a credit card. I've got one that I used once a month to pay web hosting fees and pay off immediately, the rest of the time it lives in a desk drawer.
posted by Happy Dave at 7:13 AM on October 20, 2008

You can sign up for a 30 day free trial at Credit Expert, which is run by Experian. You can see your credit report for free in those 30 days, but you have to pay for your credit score (£5.95, I think). If you don't want to pay the monthly subscription, make sure you cancel before the trial is up.

You need a good credit score in order to get credit - and without a credit history, your credit score will be poor, even though you have no debt. I would say, so long as you pay your credit card off each month, you're better having one than not, as it will add to your credit history, and improve your credit score.

Also, if you're still a student, you'll probably have an easier time getting a student credit card without much credit history, than you would getting a card with equivalent rates in the real world.
posted by shaka, when the walls fell at 7:46 AM on October 20, 2008

First of all I don't know about differences between the US and the UK, but considering the same companies are involved I assume my advice will apply.

I assume she's talking about building up my credit rating so I can get loans more easily

The other factor is that rate at which you will get loans. People with excellent credit ratings will get lower rates than people with average credit ratings, which in the case of large loans such as mortgages could add up large amounts of money.

Is having a credit card and not using it (I'm terrified of spending money I don't have) really better for me than not having a credit card AND not having and debts?

Yes. On a practical level, having a credit card and not using it shows that you can handle the responsibility of having credit without overspending. On a technical level, having an unused credit card builds up months of bills marked "Paid" (it doesn't matter that you owed nothing, the credit agencies only really care about Paid/Late/Unpaid). It also raises your average account age statistic, which helps because if you have a long history of paying on time it means that you are less likely to default than someone with a shorter history.
posted by burnmp3s at 7:53 AM on October 20, 2008

Whether or not your are on the electoral register for your council/borough/local-flavour-of-government makes a difference.

UK credit agencies like to see that your "rooted to your community," and for reasons that are baffling to me, feel that adding yourself to the register of voters is a big deal.
posted by generichuman at 8:54 AM on October 20, 2008

Thanks, those are all very useful answers!

Happy Dave: Yep, I spent ages going through the askMe archive then completely forgot to check google. Colour me embarrased.

shaka: Yes, getting a card does seem quite easy at the moment. I have accounts with two different banks and every time I walk into either, they say "Oh, I see you haven't got around to getting a credit card yet. Just sign this form...". The rates look pretty reasonable too, insofar as I understand the small print.

burnmp3s: Sounds like a good idea. Maybe I can set up a direct debit to automatically pay the credit card off? I'm solvent but disorganised, so that sounds ideal to me. I'll look into it, and I'm sure the commission-happy cashiers in my bank will be delighted to fetch the relevent forms.

generichuman: Due to a clerical glitch in the last election, I'm currently on the electoral roll in three different places. Presumably my credit will be three times as good? :-D. (I really must get myself de-registered from those old wards before I get arrested for some sort of voting fraud...)
posted by metaBugs at 9:13 AM on October 20, 2008

What Martin Lewis has to say on the subject.

You will need a credit history eventually, unless you're planning to live off the grid - it's not just used for loans, but also for rental applications and utilities accounts; you've already started with the phone contract. I recommend getting the credit card and using it for emergencies only if you don't yet have a regular income (I got my first as a student in case my specs broke), but if this isn't the case then using it for most purchases and paying it off in full each month is a great start.

This is the perfect time for you to start learning responsibility with your finances - think about all of the things you're going to need in the not-too-distant future, setting up a home and starting your career. Credit cards give you broader options for purchasing and greater protection, through chargeback and the Distance Selling Regs, and make planning for major purchases easier. Don't think of credit as spending money you don't have, but as increasing your options to maximise the money you do have.
posted by goo at 9:36 AM on October 20, 2008

Sounds like a good idea. Maybe I can set up a direct debit to automatically pay the credit card off? I'm solvent but disorganised, so that sounds ideal to me.

You should check with whatever company is providing the credit card for whether or not you can pay the entire balance automatically every month, in my experience some do allow it and some don't. One way to help be more organized is to save all of your receipts when you buy things, and keep them in a file at home. Once a month, compare them to the charges on your billing statement and pay your bill. That will help you make sure that you aren't being overcharged by error, and it will get you into the habit of looking after your finances every month.

As for getting a card, make sure you read the fine print and understand it. Many of the terms of the contract won't matter as long as you pay off the bill every month, but you should be aware of all of the rates and fees. One thing to look out for is an annual fee: most credit cards do not have them (in the US at least) but they do exist and you should avoid any card that has one. You also may be able to get a rewards credit card, which would pay you a percentage of each purchase (usually 1%) in cash or gift certificates.
posted by burnmp3s at 12:11 PM on October 20, 2008