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What's Your Credit Score?
Being able to gauge when we can buy something on credit – and when we cannot – is a particular form of awareness that needs cultivating, especially in economies where there is a strong consumer credit culture.
This is where knowing what your credit score is, keeping a regular eye on it and working on improving it becomes important.
So, what is a credit score?
A credit score is a 3-digit numerical value that indicates to lenders any other third-party authorities, such as employers, retailers and landlords, how trustworthy you are when it comes to making debt repayments.
Your credit score ranges between 0 and 999, depending on which credit reference agency (CRA) has issued the credit data to the lender.
In the United Kingdom, there are three CRAS - Experian, Equifax and Callcredit.
The way it works is that the higher your credit score is the less of a risk you are likely to be, i.e. the more creditworthy you are likely to be.
What is 'creditworthiness'?
The very concept of credit revolves on trust.
The lender has to be able to trust that the borrower has the financial capability of being able to pay back the money that they have borrowed in full, on time and with any additional charges, such as interest fees.
So, being creditworthy refers to how much someone is trustworthy with credit.
Your creditworthiness is measured through your credit score, where the higher your credit score is, the more creditworthy you are likely to be deemed as by lenders.
Having a high credit score can help you to acquire the best deals available for credit cards, credit agreements, loans and mortgages.
Conversely, if your credit score is on the lower end of the scale of creditworthiness, then lenders may regard you to be more of a financial risk for them.
This may mean that they could either refuse your credit application or offer you credit but at the price of paying very high interest fees.
What does your credit score mean?
Here is a rough guide on what different credit scores could indicate:
Credit Score: 635-999
What this may mean: Credit applicants with a credit score in this range could be considered low-risk, as they probably have a credit history that shows repayments were made in full and regularly.
Credit Score: 610-634
What this may mean: Credit applicants with a credit score in this range could also be considered to be low-risk, as their credit history would also suggest to lenders that they have not experienced significant issues when paying back money they have borrowed previously.
Credit Score: 588-609
What this may mean: Credit applicants with this credit score could be considered by lenders to be a moderate risk, as they may have defaulted in their debt repayments, or have too many credit accounts open.
This may also suggest to lenders that the applicant could be desperate for credit!
Credit Score: 560-587
What this may mean: Credit applicants with this credit score could be considered by lenders to be of high risk.
This might be down to their credit history reporting multiple missed repayments, or other issues, such as having a County Court Judgement (CCJ) or being declared bankrupt or insolvent.
They may not be registered on the Electoral Roll, or are registered but have not updated their details on it.
Credit Score: 0-559
What this may mean: Credit applicants with this credit score could also be considered by lenders to be of high risk.
This is probably because they have experienced significant issues in making their debt repayments and may have even been refused access to lines of credit previously.
How is your credit score calculated?
Credit reference agencies as well as lenders calculate your credit score using the data in your credit report via a mathematical algorithm.
It might be worth noting that each lender is likely to have their own way of calculating your credit score, but the data they would need to do this would have to come from your credit report. This is because each different financial product has a different profitability scale and target customer.
What information does your credit report have?
A credit report is a specialised document that summarises our financial history in relation to credit and borrowing.
The main purpose of a credit report is to provide lenders information on how a credit applicant - i.e. the potential borrower - has utilised credit within the past 6 years.
Your credit report typically contains the following types of information:
Personal Information - Your name, date of birth, current and previous addresses.
Credit History - Details of credit accounts both in your name or held jointly with another party, such as a spouse. This includes account balances, when the account was opened, the credit limit or loan amount, the terms and conditions and a history of late payments.
Enquiries or 'Searches' - An enquiry is recorded on your file whenever your report is shown to another party for example lenders, insurers, landlord or another service provider. Enquiries remain on your credit report for up to two years.
Public Records - Government records such as court rulings including County Court Judgments and bankruptcies. Most of this type of information stays on your credit report for 6 years.
The difference in your three credit reports should not be that much, as the data used to generate your credit report should be the same.
However, if you do see any glaring differences or omissions between the three credit reports that you get from the three credit reference agencies, then we would suggest that you contact the CRA directly to resolve the errors.
How to discover your credit score
In the United Kingdom, you can find out what your current credit score is by either:
1. Writing directly to any or all of the three credit reference agencies requesting them to you send your statutory credit report with your credit score included. Please note that a surcharge may apply for this.
2. Signing up to a subscription service that provides you with updates on any changes to your credit score and monthly publications of your credit report. Please note that you may have to clear a screening test of some sort by the service providers in order for them to eliminate the risk of identity fraud and to ensure that it is you who is seeking to sign up to their service and not someone else trying to impersonate you.
How to improve your credit score
Here are our top suggestions to help you improve your credit score:
1. Avoid making late payments or missing payment due dates altogether. This sort of financial behaviour could lower your credit score.
2. Close any unused credit accounts, as this could indicate to lenders that you might have issues in paying the outstanding balances due on such accounts, when in fact you haven't used these.
3. Avoid making too many credit applications at the same time. This could otherwise indicate to lenders that you are desperate for cash - an impression that you obviously don't want to convey.
4. Look out for any court judgements, bankruptcy or insolvency orders that are currently valid. If you have any of these, we think it would be best to hold off making any significant credit applications until these end. These are typically valid for six years.
5. Use a 'credit-building' credit card to help you build a better credit history. This especially applies to those of you with a poor credit score. While these credit cards can come with very high interest charges and narrow credit limits, if you can pay off the balance on time and in full, this should help you to improve your credit score a great deal.
© 2016 My Credit Monitor