Your credit score is something that needs to be nurtured and kept healthy. It no longer only dictates whether you will be eligible for a mortgage, personal loan, small business loan or a credit card but can affect mobile phone contracts, monthly car insurance, bank accounts and hundreds of other things.
In this article we shall be looking at:
- What credit scores are
- How they are calculated
- Where does the information that credit rating agencies have come from?
- How credit scores are rated
- How your credit score changes
- What financial products you can get with different scores
- Ways to improve your credit score
What is a credit score?
A credit score is a numerical value that indicates what kind of borrower you are. It is not an indication of wealth but of creditworthiness. Generally speaking if you have borrowed responsibly in the past and have paid your debts on time you are likely to have a high credit score, unlike some body who has had financial problems who will generally have a lower credit score. Many factors will affect a credit score, like the amount of lines of credit that you may have open to you at a specific time. Another will be if repayments are paid on time or delayed.
Many factors will affect a credit score, like the amount of lines of credit that you may have open to you at a specific time.
Lenders rely on credit scores to judge an applicant’s suitability for various products that they may be offering. It means that they do not have to spend time and resources searching through every applicant’s financial history, allowing them to process loans, mortgages, credit cards and even phone contracts in a fast, efficient manner. A simple credit score number makes it extremely simple for financial servers to process applications and make lending decisions.
How are credit scores calculated?
A lender is interested to know whether a borrower is likely to make the monthly repayments on time, so by having this number to refer to they can get a good idea. A credit score is not just calculated on a person’s repayment history but on all their financial history. This is stored on a credit file. These files are maintained by Credit Reference Agencies and are routinely updated with all the latest information regarding your financial status. This information consists of:
Personal details – This includes your name and date of birth, your current address and any previous ones.
Credit history – Things like bank balances and the number of credit accounts that you have, credit limits, current loans and your repayment history.
Enquiries – Enquiries are noted when you are applying for credit and your file is checked by a lender, a landlord, an insurer or other services.
Public records – Government records like court rulings, bankruptcy and any County Court Judgements.
Your credit score is calculated by a special mathematical formula which analyses all your personal data by balancing the findings and producing a three digit number which represents your creditworthiness.
Where do credit rating agencies get their information from?
Credit rating agencies do not ask borrowers for their credit history. Their information is provided to them from banks, shops, credit card companies and many other sources. All of these kind of financial institutions regularly hand over information about their customers. They report on people who owe them money and the finer details such as the amount borrowed and how payments are being repaid. Things like being late with repayments, over borrowing or being up to the limits on credit cards, can obviously go against a borrower.
Credit score questions:
One major credit reference agency in the UK, Equifax, considers a score of 420 and above good. This agency scores credit in the range of 0 to 700, therefore achieving 420, which is above the UK average of 380, should suffice as a good credit score for your lending needs. It is important to note that these figures vary from agency to agency.
A bad credit score will typically remain on your credit report for six years. If you have missed debt repayments, these will be recorded and appear on your credit report for at least three years. In the event that you have a bad credit history, it is crucial that you frequently review your credit report after having paid off a debt in order to improve your credit rating.
While improving your credit score can be a lengthy process, there are certain steps that you may follow to expedite the process. Firstly, you would have to clean up your credit report and pay down your balance at the earliest opportunity. By paying twice a month, you would indicate that you are capable of making repayments frequently and systematically. You may also wish to consider increasing your credit limit and opening a new credit account. Finally, to help consolidate your debts, you may negotiate outstanding balances with your existing lenders.
Lenders will not have the same scores
A very important point to remember about your credit score is that it is not a universal number. Every financial service will have their own methods of calculating a credit score based on their own different formulas. The only thing that will stay the same is the raw data that they have. This is a perfectly normal way of doing things as different products require different criteria. There are huge differences in the way that a mortgage is assessed and the strictness required in order to obtain one, compared to a simple product that may only have 12 monthly repayments. The risk factors are completely different in these cases so the credit score will be different.
What is considered a high credit score?
Lenders in the UK get their credit rating scores from three main credit rating agencies. These main three are called Experian, Equifax and TransUnion. All three use a different scale to rate creditworthiness. Lenders use different agencies to get credit scores and also have their own formulas to establish a credit rating depending on the product that you are applying for, so if you are rejected by one lender you could be accepted by another.
This is how the three credit rating agencies score your creditworthiness:
| Experian | Equifax | TransUnion | |
|---|---|---|---|
| Very poor | 0-560 | 0-278 | 0-550 |
| Poor | 561-720 | 279-366 | 551-565 |
| Fair | 721-880 | 367-419 | 566-603 |
| Good | 881-960 | 420-466 | 604-627 |
| Excellent | 961-999 | 467-700 | 628-710 |
By using the Experian credit rating system we can show you roughly how your credit score can affect different financial products that you may be eligible for.
Excellent: 961-999 This score should get you the best credit cards, loans and mortgages (but there are no guarantees)
Good: 881-960 This rating should get you most loans, credit cards and mortgages but the best deals may reject you
Fair: 721-880 You may get reasonable interest rates, but your credit limits may not be high
Poor: 561-720 This score may see you accepted for loans, credit cards and mortgages but they could have higher interest rates
Very poor: A very poor score means that you are likely to be rejected for many loans, credit cards and mortgages
Credit scores continuously change
The thing with credit scores are that you can’t just call them a number that will stay the same, as the score will continuously change, depending on your borrowing habits. Your score changes all the time, but is ultimately based on how responsible you are with regard to your credit habits. An example of this is with an Experian credit score, if you do not pay a bill on time you will lose 130 points, but by using 30% of your credit card limit, or less, you can gain 90 points.
Lenders do not only want to see how good your reference is but can also be evaluating you for future financial products that they can make more profits from. Remember that someone who uses a credit card responsibly will not generate any profits for them. Another thing to consider is that lenders are more interested in your current credit history, as opposed to a payment that was missed years ago.
What can I hope to get with my credit score?
The different products that will be available to you will greatly depend on your credit score. This is not a number that is carved in stone, as every lender will gather their own information too and will judge you by making their own credit score. All they are trying to do is to predict your future behaviour by checking out your past. This is why it is important to remember that although you may get turned down by one lender, another may view your credit score differently. Of course, having a high credit score is a definite advantage but it is not always a guarantee that a lender will accept your application.
So what have we learned so far?
- A credit score indicates the type of borrower that you are
- They speed up applications for credit
- Credit rating agencies gather information from retail and financial institutions
- Lenders have their own methods of credit rating
- The three main credit rating agencies have different scoring systems
- Credit scores are continuously updated
- Getting turned down doesn’t mean another lender won’t give you credit
How is a good credit score calculated?
When you are applying to a lender for a loan, mortgage, credit card or some other financial service, a credit score will be made for you that will have many different factors taken into consideration. Here is a list of the main things that will be examined:
- A credit report from a credit rating agency
- The information that you have provided on the application form
- Information that they may already have on you
- Public records
- Their own lending policy, which will vary from other lenders
A higher score will allow you access to the best deals on the market with the best rates, as you are considered a lower risk.
A higher score will allow you access to the best deals on the market with the best rates, as you are considered a lower risk. Your credit history will be examined based on your credit report, which will give them an indication of how good you are with repayments, if you have credit cards and whether you have a mortgage or other loans. This is done so that they can draw their own conclusions and estimate whether you are likely to repay the money.
Here are some ways that you can improve your credit score
Check your credit report for mistakes
It is important to check your credit score every year to be certain that the information that they are holding about you is correct. It costs 2 pounds to check your credit score, there are also ways to do it for free, and you must make sure that you check all of the three big agencies as each may have different information on you. Mistakes are easily made that could affect your applications for credit. If you do find any mistakes, you can contact the company that provided the misinformation directly, or the credit rating agency, who will investigate for you.
You’ll need to be registered to vote
By not being on the electoral roll you could find yourself unable to get credit. The reason for this is because lenders use the roll to confirm that the address you have given is correct. The Register to vote website allows you to register at any time that is convenient.
Take advantage of rental payments
A new free scheme called the Rental Exchange, helps people who pay their rent on time use this to favourably improve their credit score. It is a very simple and clever idea that allows the rental payments to be recorded by the tenant paying the rent to a third party called Credit Ladder. They accept and pass on the payment to the landlord and then inform the credit rating agency if the payment was paid on time.
Do not apply repeatedly for credit
When you apply for credit a footprint is left that is visible to other lenders. If you have been denied credit then it is best to leave some time between applications as by continuously applying you could imply to lenders that you are in financial difficulty. When applying for new credit you can ask lenders to do a quotation search as opposed to a credit search. This should provide an idea of the interest rates that would be offered and as to whether your application is likely to be accepted.
If you are interested in finding a mortgage lender then is is a good idea to always ask for a quotation search as you will need to shop around and compare prices. It is better to apply for credit before moving house, or changing job, as lenders like to see stability and these upheavals could affect your credit rating.
Credit usage should be kept low
Lenders will examine your outstanding balances as well as how much credit is available to you. You should aim to keep your credit below 50% of the limit that has been set otherwise lenders could view this as an indicator that you do not know how to manage your finances well.
Financial associations with ex partners should be terminated
Being with a person who has a bad credit rating cannot affect yours, but taking on a financial product or opening a joint bank account with them can link you together. Lenders may examine their credit score as well as yours and you could be turned down because of this association. Lenders may fear that they could influence your life and cause repayments not to be met. If you have had a past relationship with joint financial products, you can ask all three agencies to add a “notice of disassociation” to your file.
Make a good credit history
By making sure that you pay your repayments on time and staying within your credit limits, you can show lenders that you are a conscientious borrower. If you are a first time borrower it is a good idea to take out a credit card specially designed to help people build, or repair their credit score. APRs for these kinds of credit cards tend to be very high, so it should be used to shop and repay the balance in full every month. This will help to show that you are creditworthy.
All is not lost if you have a bad credit score
As we have shown you, there are ways to pick up a bad credit score which will allow you to be considered in the future for credit. It has become an essential part of our daily lives and can have an effect on things like changing energy suppliers, to car insurance. Of course, if you need a loan in an emergency, you can resort to loans for really bad credit lenders only, but their rates are very high and the loan should be repaid asap to avoid the debt spiraling. But with some careful steps, your credit score can be righted, and your future made a little bit brighter.