Your credit score is one of the most important numbers in your financial life. It can determine whether a lender will grant you a loan or a credit card. And it can have a direct impact on the overall cost of a house or car. But what exactly is a credit score? Let’s take a look.
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What is a credit score and how is it calculated?
A credit score is a three-digit number, typically between 300 and 999, that indicates how reliable you are when it comes to borrowing and repaying money.
The score is based on the information in your credit report, which provides lenders with your credit history, or how you have handled credit in the past. Every time you take out any kind of credit or loan through a formal institution, the lender will disclose that information to credit bureaus. These bureaus will then compile it and then use it to create your credit report.
For a number that can have many implications for your financial wellbeing, your credit score varies with each credit bureau.
Experian calculates your score out of 999. Equifax’s score is out of 700, and TransUnion gives you a score out of 710.
However, since all of the bureaus base their scores on your financial history, you are likely to fall into the same rating category (e.g. good or bad) with all of them.
What is the importance of a credit score?
Lenders use your score to help them determine how likely you are to pay back the money you borrow without default. It’s essentially their way of planning for the risk they’re taking by lending you money.
The higher your credit score, the lower your perceived risk of default. That means the better your chances of being accepted for credit and at the best possible rates. If you have a low credit score, you may have difficulty obtaining credit or you may be offered credit at a higher interest rate.
Your credit score is not just used for loans and credit (e.g. credit cards, car loans, and mortgages). Insurance companies can also use it to determine whether to offer you insurance and how much to charge you.
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What factors can affect my score?
A number of factors can cause your credit score to change, including:
- Your credit repayment history (including missed or late payments)
- How much available credit you are using (this is known as your credit utilisation ratio) and your total debts
- Public records (e.g. whether you are on the electoral roll and whether you have any county court judgements or individual voluntary arrangements).
- The number of hard credit searches on your credit report (which happen when you apply for credit).
How can I check my score?
By law, you are entitled to a free copy of your statutory credit report from each of the three credit reference agencies. This contains basic information about you, including any credit accounts you have, any missed payments and defaults and electoral roll information.
However, this report doesn’t include your credit score. To get your score, you’ll need to navigate to the website of your chosen credit bureau and sign up for an account. All three bureaus offer a free trial period for accessing your credit score, after which you may have to pay a monthly fee.
Alternatively, you can use a multiple-agency reporting service such as checkmyfile. This service essentially checks your score at multiple agencies at once.
When you sign up, you will have access to all of the information held by the three credit reporting agencies, including your credit score, for 30 days. After that, you might have to pay a monthly fee.
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