Credit ratings seem to be a pretty big deal whether you’re an individual or a company – or for that matter, a country. Take the UK, for instance, whose creditworthiness recently received a bit of a slap in the face. Just last month Standard and Poor’s (S&P), the last of the major credit ratings agencies to grant the UK an AAA credit rating, warned that this rating is now in a precarious position. Previously the other two big agencies, Fitch and Moody’s, had downgraded the UK to AA+ and AA1 respectively. S&P said there is at least a one-in-three probability that the UK will lose its AAA rating within the next two years. And although the rating has not actually been cut yet, the fact that it has been downgraded to negative is a matter of concern for many observers of the economy.
S&P justified their revised outlook by citing the decision of the newly elected Conservative majority government to hold a referendum on the UK’s European Union membership by 2017. They said this decision represents a risk to growth prospects not only for the UK’s financial services and export sectors but also to the wider economy. As well, the possibility of the UK departing from the EU “raises questions about the financing of the UK’s large twin deficits and its high private short-term external debt.”
In light of the fact that Chancellor George Osborne used to proudly cite the UK’s AAA rating as a symbol of its success (a boast he hasn’t been making much lately), is a downgrade a symbol of failure or impending doom? It’s not the end of the world (yet), but the UK’s big deficits in trade, investment, and public finances mean that we currently have the worst external liquidity metric of any of the 129 countries rated by S&P.
Even so, where the credit downgrade is concerned there are still many variables, and much depends upon the EU issue. And at least we’re not as bad off as Greece, which S&P recently downgraded to CCC (from CCC+).
But enough about the UK’s credit rating… what about yours?
Credit matters, and most of it is within your control
Having good personal credit may not be the most important thing in life, but it’s almost impossible to obtain a credit card, loan or mortgage – at least with reasonable rates – if your credit is bad. It can even be difficult to get a mobile phone or insurance if you have questionable credit, and many landlords and employers also check their prospective tenants’ or employees’ credit reports.
Many factors can affect your credit rating, and you may not even be aware of some of them. The good news is that most of these factors are well within your control. In the UK, for instance, if you are not registered to vote you won’t have a clean credit score. Lenders use voter registration information to verify the names and addresses of applicants. In addition, being late on or missing even a single payment on a utility or mobile bill could compromise your credit, and repeated late or missed payments can be very troublesome. Setting up direct debits for your monthly bills can solve the problem of late payments, though of course this requires keeping your bank account adequately funded (and/or having overdraft privileges); otherwise you’re just creating more problems for yourself.
Very simply, living up to your commitments – consistently – is one of the best things you can do to prove you are the low credit risk that lenders seek. James Jones, head of consumer affairs at the credit reference agency Experian, says that meeting a big obligation such as a mortgage for more than a year will certainly help your credit score. At the same time you don’t want to get yourself too deeply in debt, no matter how faithful you are about making payments on time. Lenders will check on how much you owe on credit cards and other unsecured debts like personal loans. Owing more than £30,000 will affect your score negatively and the more you owe, the bigger the impact, according to Mr. Jones.
Keep track of your credit report
One of the most important things you can do for your credit rating, apart from handling money and debts responsibly, is keep track of the information that the credit agencies have on you. One good reason is that, more often than you might realize, erroneous or outdated information is on your record, and it can adversely affect your ability to get credit when you need it. That’s why it is so very important to monitor the information gathered by the UK’s three major credit reporting agencies, Callcredit, Equifax and Experian. It’s not that difficult nor is it expensive; you can get a standard statutory report for just £2, or even check your credit report for free. Once you’ve verified the accuracy of the reports (and corrected any inaccuracies), you will have a better idea of where you stand, and you can work to improve your creditworthiness if necessary.
You may not have any control over the UK’s credit ratings, but you have a great deal of control over your own. Here’s to a brighter and more prosperous future for all of us.