Ever wondered about the importance of a good credit score? Well, if you want to apply for a financial product, such as a loan, credit card or mortgage, a good credit score is crucial.
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This is because your credit score could be the deciding factor, since lenders use it as a measure of how likely you are to pay them back.
So you might also be wondering about the difference between a good and bad credit score. In order to understand different credit scores, you need to look at the role of the agencies responsible for the scores.
Credit reference agencies
These agencies are responsible for collecting and storing information on your past financial behaviour. This information includes your bill payments, credit card payments, loans and mortgage payments. It also includes any county court judgements against you and your registration on the electoral roll.
The CRAs use this information to build your credit history. They are responsible for giving you a credit score based on your history. If you apply for a financial product, such as a bank loan, the bank will check your credit score. This illustrates the importance of a good credit score.
Credit score ranges
Each CRA uses a different scoring system. If you want to know if a credit score is good or bad, you will need to know which CRA has given the score as well as the score itself.
- Equifax issues credit scores out of 700. A score in the range 0 – 279 is very poor, 280 – 379 is poor, 380 – 419 is fair, 420 – 465 is good and 466 – 700 is excellent.
- TransUnion issues scores out of 710. A score in the range 0 – 550 is very poor, 551 – 565 is poor, 566 – 603 is fair, 604 – 627 is good and 628 – 710 is excellent.
- Experian issues scores out of 999. A score in the range 0 – 560 is very poor, 561 – 720 is poor, 721 – 880 is fair, 881 – 960 is good and 961 – 999 is excellent.
The impact of a credit score
Remember that when you apply for a financial product, the lender has the right to refuse your request. From the lender’s point of view, it’s all about risk. A person with a bad credit score is considered to be high risk, but a person with a good credit score is low risk.
If you have a good credit score, you will have a greater choice of financial products and a better chance that any applications will be approved. You will also get better deals on borrowing in terms of interest rates and fees.
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If you have a bad credit score, your applications for financial products could still be approved. However, your choices will be limited. You may also be asked to pay a security deposit when signing up for some services, such as utilities.
If you don’t own your own house, looking for a place to live highlights the importance of a good credit score, since it can influence your options. Landlords might be put off by a potential tenant with a bad credit score, so your choice of home could be reduced.
Improving a bad credit score
It’s best to check your credit score regularly. You will need to register with one or all of the three CRA’s and they will issue you with a brief report free of charge.
You can also request a more detailed report for a fee depending on the CRA. It’s worth paying for a detailed report initially so you can identify any problems.
If you have not already done so, register to vote so your name and address are on the electoral roll.
Get your finances in order, because you need to know where your money is going on a regular basis. Reduce your debts and keep them low. Make sure all of your monthly bills are paid on time. You can do this by setting up direct debits.
Improving and maintaining a good credit score is important. Applying for loans and financial products is much easier with a good credit score. Even if you don’t borrow money, your credit score will have an impact when you sign up for essential services such as utilities.
Improving your credit score will take time and financial discipline, but it’s definitely worth it and in your best interest.
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