Mind investment gamble odds in a world of diminishing returns

The days when banks and other lenders based credit decisions on relations with people are long gone. Today credit control is everything, and computers just spit out a yes or no answer based on a credit score held by agencies such as Experian, Equifax, Callcredit and Clearscore. These businesses compile data on the assets and liabilities people have, then produce a credit score. These are used as the basis on which loans are approved, mainly for buying consumer products but also for mortgages and some other loans.

Crucially these records include situations where other companies put a black mark against someone over an unpaid debt, even if it hasn’t been pursued via the courts.

It’s debts like these that lead to unexpected bad credit scores. Recent examples have seen people refused mortgages they expected to secure due to small debts, often from mobile phone or TV/broadband providers where business has moved to another firm and a standing order was cancelled. When attempts are made to collect small final balances this proves impossible and it is reported as a failure to pay. One or two of these, regardless of the amount, and your credit score plummets. All you will know is you’ve been refused credit, but you’ll not be told why, or even the credit checking company that’s given the bad score.

In one example a mortgage was refused over a mobile phone debt of £24 that the person knew nothing about.

The immediate reaction is that this is far-fetched and there must be other problems, but I know of one case where a person went for a car loan, which was expected to be automatic on the assumption it was based on them recently having taken out a large mortgage, for which a credit check was successfully undertaken. Credit for the car was refused and no reason given, leaving them no option other than to sign up to one of the credit score companies to get the details.

It transpired that when they moved house Virgin broadband tried to collect a £17 balance after taking the equipment away. They sent the details to the old house and they weren’t forwarded. The result was a credit black mark, which lowered the credit score enough to have the car loan, through the manufacturer, refused. The person then had to go to another loan provider, at a higher rate, to reflect the poor credit report, meaning that over the term of the loan it will cost hundreds of pounds more in interest.

This is where credit scoring companies earn the fee you pay them. They’ll tell you what’s creating a negative and work with you to clear it. In this case Virgin admitted its mistake, apologised and wrote off the balance. Within a few weeks the credit score was back to the level where credit was freely available.

Just one debt can create problems. If you sign up, or use one of the free services to get your score, it can pay dividends, since the higher your score the lower the interest rate. It’s also defence against identity fraud – if you pay a monthly fee to a company such as Experian it will tell you each time a search is undertaken; if you haven’t sought credit, you’ll know fraud’s being attempted.

In an age when financial knowledge is power, to paraphrase Francis Bacon, it’s worth getting and maintaining your credit score – and you can reduce the monthly fee for the market leaders by excluding the identity insurance element.

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