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.
What is the purpose of a credit score?
In simple terms, a credit score, as determined by credit bureaus 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.
Where can I find my score?
All the agencies provide access to individual credit profiles, which can be viewed online if you sign up. It’s actually fairly easy to check your credit score for free.
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.
What is a good credit score?
The credit reference agencies use a numbering system to allocate a score. It is important to know that a ‘good’ credit 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.
Why it’s important to have a good credit score
A good credit score is about more than just having access to a wider range of credit products. It can affect daily lifestyle choices such as where you work and live too.
Your credit becomes cheaper
A good credit score puts you in a better position to negotiate a lower APR. This is especially helpful for long-term credit products such as mortgages, as it can result in savings of tens of thousands of pounds over the loan term.
It can improve your job hunting
Certain roles require you to have a good credit score, especially finance roles.
Some long-term contracts require a good score
Whether it’s a lease agreement for that swanky pad in town or a mobile phone contract, you’ll need a passable credit score. Other institutions that may perform a credit check include insurance agencies, private schools and gyms.
What affects my credit score?
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.
- 10% new credit – you don’t want to have too many new credit accounts open on your profile; longer-standing accounts are preferred.
How do you maintain a good credit score?
There are several ways you can maintain a good credit score or improve your credit score. Let’s take a look at five steps you can take:
1. Monitor your credit report regularly
If you see your score drop suddenly, take a closer look at your credit report. Maybe you forgot to pay a bill or maybe there are signs of fraud, such as new lines of credit you don’t recognise. Always contact the CRAs if you notice an error to see how you can fix it.
2. Pay your bills on time
Payment history has a significant impact on your credit score. Even a couple of missing or late payments here or there can damage a good credit score. To make sure you don’t miss payments, try automating your bills. You can also simplify your bills by cancelling subscriptions for things you no longer need or use.
3. Check your credit utilisation rate
Your credit utilisation ratio is the relationship between how much credit you have available (the limit on your credit cards, for example) and how much of it you’re using.
To keep a good credit score, you should ideally use no more than 25% to 30% of your limit at any time. So if you have a £1,000 credit card limit, try to maintain a maximum balance of £250 to £300.
If you do use more, aim to pay off your card in full at the end of the month.
4. Slow down with credit applications
Every time you apply for a new loan or credit card, this triggers a credit inquiry. While checking your own credit report won’t affect your score, inquiries by lenders can have a negative impact. Apply for several lines of credit within a short period of time and the effect can be even worse.
The takeaway? Don’t apply for credit unless you really need it. And if you’re rejected, look into why rather than immediately applying to another lender.
5. Keep your information up to date on the electoral register
Lenders access the electoral register to confirm your information, including your name and address. If you move but don’t update your address on the register, things won’t add up. This could hurt a good credit score and even lower your chances of getting a loan approved.
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.
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