Credit Scores Explained
You’ll have probably seen the phrase “credit score”, or “credit rating”, often used in in adverts, online or in the news, but do you know what it means and why it’s important? Once you’ve finished reading our guide today, you should understand what a credit score is, where you can find out yours and the kind of things you can do that could help to improve or maintain it.
What is a credit score?
A credit score is a 3-digit number that shows you how likely you are to be accepted for credit. It’s based on your credit report, which is a record of how you’ve handled credit in the past.1 Your score acts as an indication of whether or not you’ve got a good chance of being accepted for credit. This could be a loan, a credit card, a mortgage, an overdraft and so on. If you have a high credit score, you’ll then have a higher chance of being accepted for lines of credit at better rates.
How can I find out my credit score?
You can see your credit score by registering your details with a credit bureau. There are a few free services like ClearScore or Noddle. Another popular site is Experian which is free to sign up for. You should be aware that credit scores are calculated differently by different credit bureaus and websites. For instance, Experian will give you a score between 1 - 999, Equifax between 1 - 700 and Callcredit between 1 – 710, a higher score indicating a better credit rating. The scores are then grouped into tiers from very poor to very good to help companies assess whether they’d like to lend you credit.
Why is a good credit score important?
As mentioned earlier, a good credit score will help you when it comes to applying for credit in the future. Not only could it increase the likelihood of applications being accepted, it can also mean you’re offered more at a better rate. However, it’s not only borrowing that can be affected by your score: prospective employers may check your credit rating and it could sway their decision. It can even affect your insurance rates – some companies may look at your report and price your insurance based on negative behaviours2. Looking to get a new phone/TV contract? Yup, that’s affected by your credit score as well. Your score will be checked before any new contracts are taken out and that could affect the outcome of the contract you wish to take out. If you have a bad credit history or have been refused credit in the past, you may only be offered older models of phones as they’re lower risk for the providers.3
How can I improve my credit score?
There are a few ways in which you can improve your score. One simple way is just to register on the electoral roll at your current address. This small change helps companies confirm your name and address, and that the details you’ve provided are accurate. The more information that lenders have on you, and that they can verify, the more comfortable they’ll feel about lending you money. Managing your household bills can help too, as paying them on time can show that you’re responsible when it comes to repayments.
If you have a credit card, always pay your bill off each month in order to minimise interest payments. This shows that you’re a responsible borrower, but try not to use all the credit that you take out. Keeping your credit utilisation (the percentage of credit that you use from what you’ve been offered) low is a positive for companies. An example of a good credit utilisation would be around 25%, so if you had a Credit Card with a limit of £1,000, only using £250 of it would be 25%4 utilisation.
You should also beware of things that will have a negative effect on your credit score, such as making multiple applications for credit in a short amount of time. This could indicate that you’re desperate for credit, and therefore higher risk. You should also look for any mistakes that may be on your credit report, which may be bringing your score down, and get them fixed as soon as possible. Credit Bureaux are under a legal obligation to correct any errors on your credit record.
If you’re a Cashplus customer on a product with a monthly fee, you could take advantage of the Creditbuilder facility. Creditbuilder is a feature that aims to help you build your credit score over a fixed period of 12 months. You can find out more about it here.
This content was created on 8th August 2018