Like many things in life, you may have heard of a ‘credit score’ but not be overly familiar with what it actually is. You may know that it plays a significant role in your finances – but what you really need is to understand exactly how it does this. Then you can make sure it is in tip-top shape to work well for you.
In simple terms, a credit score, as determined by reference agencies such as Equifax, Experian and TransUnion, tells banks and other credit providers to what extent they should lend, or extend credit, to a particular person.
Such borrowing includes taking out a contract with a mobile phone provider, a hire-purchase arrangement, a bank overdraft, a credit card, a mortgage, and so on. The greater the amount of credit you want, the better your credit score will need to be.
All the agencies provide access to individual credit profiles, which can be viewed online if you sign up. Check here for full details of how to check your profile and score.
You should make it a habit to regularly check your credit profile, looking for errors and missing information, and to ensure your score is in good shape.
The credit reference agencies use a numbering system to allocate a score. It is important to know that a ‘good’ score is different for each agency.
You want to aim for an ‘excellent’ score as detailed below:
Equifax is 466–700
Experian is 961–999
TransUnion is 628–710
With an excellent score, you are more likely to be accepted for credit and be offered better (i.e. lower) interest rates.
Your credit score will fluctuate through time; it can go up and down due to factors in your full control. You can build your credit profile through a little self-discipline and patience. The more responsible you are with credit, the more likely you are to receive more and on more favourable terms.
Your credit score is made up is as follows:
35% payment history – you should avoid late payments. Details of late payments stay on your record for six years.
30% capacity – this is the proportion of debt you have to available credit. For example, if you have a balance of £7,500 on a credit card with a limit of £10,000, your capacity is 75% (7,500 ÷ 10,000 × 100). Ideally, you want capacity to be below 30%.
15% length of credit history – having a credit profile, however modest, is better than having none.
10% type of credit used – you want to have a mixture of revolving (such as a credit card) and instalment (such as a personal loan) credit. Check here for definitions of these terms.
10% new credit – you don’t want to have too many new credit accounts open on your profile; longer-standing accounts are preferred.
If you have a low credit score, shop around for opportunities to build your credit score. Taking out a mobile contract, a credit card for people with a poor credit history or a prepaid card are good options to improve your score.
If you’re declined for credit, you should be patient and exercise good financial management to nudge up your score before reapplying. Rapid-fire failed applications will negatively affect your score.
Your income, your proportion of debt to income, and your bank balance don’t affect your credit score, so you shouldn’t despair.
However, you will need to keep your debt levels low. High debt is a warning sign to credit providers, so staying on top of repayments to reduce the balance is a great idea.
Your credit score is not to be feared. If you take full responsibility for your finances and take control, you can directly affect your credit score for the better.