Managing my money for young adults
Managing my money for young adults

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Managing my money for young adults

2  Credit rating agencies and you

Your credit rating, which is allocated to you by credit rating agencies, is a key factor in your ability to borrow money.

As soon as you open a bank account or take on a credit card from the age of 18 your credit history is recorded and a profile of you starts to build. The main UK credit rating agencies are:

These agencies will score your creditworthiness and keep a credit file on you.

Where do they get the information about you?

This is provided by your bank or credit card provider and other organisations that have extended credit to you. They include your phone provider if you have a contract with them.

The information covers the amount of credit granted to you, whether you make repayments on time and the proportion of your bill that you repay each month.

Increasingly financial companies are using what are called ‘geo-demographic models’ to help them assess customers. For example, postcode profiling of the location where you live can help draw up a picture of your likely financial lifestyle based on census and other survey data. One insurance company recently tried, unsuccessfully, to access information from Facebook to analyse motorists’ profiles for clues about how sensible they are. Facebook blocked this move but it highlights the need to be careful about what you post on social media given who could be watching!

Your credit score will be accessed by financial and other institutions when you’re seeking to borrow money from them. A poor credit score means you will be turned down for a mortgage when you’re seeking to buy your own property.

Have you taken a look at your own credit rating? It’s recommended that in future years, and particularly when you become active borrowers, you should keep an eye on your credit files at least once a year.

Watch this video where Martin Lewis uses a storyline based around exchanges in a non-alcoholic bar to illustrate the key principles that will affect a person’s credit rating.

Download this video clip.
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Transcript

MARTIN LEWIS
One of the things that is going to happen in your life, you're going to have to manage your credit score. You're going to have to manage your credit worthiness. Whether you get a mortgage or not depends on this. Whether you get a mobile phone on contract depends on this. Gas and electricity by direct debit can depend on this. Certainly loans and credit cards depend on this.
Soon renting is going to be on your credit files. If you want to rent, they're going to be able to look at that. It has started in the trial in some areas. Whether you're able to get car insurance paid by the month depends on this. Never get car insurance pay by the month. It's a loan. It's very expensive. Try and pay it up front. You'd be better to borrow it elsewhere. That was an aside. We'll move on.
All of those things, your credit score is important to. Now, here's the point. When they credit score you, they are trying to predict your future behaviour based on your past. So we'll play a game with you, alright?
So we're in a non-alcoholic pub now because you're too young. We're in a non-alcoholic pub. I'm an old friend of yours. We're in there. I always forget my wallet. I do it every time. I forget my wallet. And I say, will you lend me 20 pounds so I can buy a round, and I'll buy you back a drink tomorrow when I've got my wallet? And you know I've done this 40 times before, and every single time I've always paid you back the next day. Would you give me the money?
AUDIENCE
Yeah.
MARTIN LEWIS
Yeah, because I have a history of doing this, but I've also got a history of paying you back. So you know it's a very limited risk doing that to me. Question number two. We're in a non-alcoholic bar. We've been friends for quite a while. I forgot my wallet, which I do quite a lot. I ask, will you lend me 20 quid and I'll buy you a drink back tomorrow? And you know that in 15 of the probably 20 times I've done this I always forget to pay you back. And even when you ask me, I don't give you the money. Would you give me the money?
AUDIENCE
No.
MARTIN LEWIS
No, because I've got a bad credit history, haven't I? I've got a bad record of paying you back. Why would you take that risk with your money? This is how credit scoring works. So they look at your data to do this.
Question number three. This is you now. You come into the bar. I'm there. I've never met you before. You look a very nice person. You say, I'm really sorry. I forgot my wallet or purse, whichever gender you want to use it, it's not gender-stereotyped anymore. I forgot my wallet, will you lend me 20 quid and I'll buy you a drink tomorrow? And I've never met you before. Should I lend you the money?
AUDIENCE
Probably not.
MARTIN LEWIS
No. You may be a very good risk, but I don't have any data. So why would I give it you? That's how credit scoring works. You get rejected if you can't afford to pay it. Well, there's one final category, actually, go back to the first one. We're in a non-alcoholic bar. I go up to you. I've previously borrowed 20 pounds off you each time and I've always repaid back, but I've just lost my job, and you know I'm skint. Would you lend me the money? You might give me the money, but would you lend me the money?
AUDIENCE
Probably not.
MARTIN LEWIS
Probably not because I've got a drop in income, which would affect it even if I've got a good credit history. That's how it works. But let's go back to the you scenario. Your issue is a lack of data. So to get people to lend to you, bizarrely you need a history of borrowing. So we got a catch-22, haven't we? I've never borrowed, so I can't get borrowing.
How do we break that catch-22? You get a special product like a student credit card that's willing to look at people who've never borrowed before. And you get a student credit card. And you put 50 to 100 quid a month of normal spending on it, things you'll buy any way, not an excuse to spend any more. And you do that. And you pay it off (SHOUTING) in full. Let's all do one. You pay it off
AUDIENCE
(SHOUTING) In full.
MARTIN LEWIS
That will do. Right, you pay it off in full every month, so there's no cost to you because if you pay a credit card off in full every month, there's no cost to you. And you are starting to build a history as a good credit citizen. So if you've got good impulse control, if you will not spend money on it, if you will not use it for borrowing, then getting a credit card at a young age is actually a good thing to do because it builds your credit history. If you've got bad impulse control, don't touch it with a barge-pole.
[MUSIC PLAYING]
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