Whether you’re looking to get a new loan or just keen to know where you stand, the world of credit scores can be confusing. Don’t worry; we’re here to cut through the jargon with our quick guide to understanding credit scores
What is a credit score?
A credit score – also known as a credit rating – is a three-digit number that lenders use to assess your finance eligibility. Your score represents how you typically act as a borrower and how likely it is that you’ll be able to repay any future loans. While it isn’t the only factor considered, your credit score can affect your ability to get a new credit card, personal loan, car finance agreement, mortgage, and more.
How do credit scores work?
Credit scores are calculated by credit reference agencies. They take information from your credit report and feed it into a mathematical model to calculate a number that will then represent your financial circumstances. The information used to make this calculation might include your past payment history, current debt situation, and employment status. In the UK, there are three main credit reference agencies: Experian, Equifax, and TransUnion. Each of these agencies uses different information and calculates credit scores differently.
Your credit score isn’t fixed and can increase or decrease over time, depending on your actions. Even so, there’s no credit score that will guarantee you’ll be approved for a loan and, while it is a factor that lenders look at, it’s not the only thing that’s considered. If you have a bad credit score, for whatever reason, you may still be able to find a type of finance that’s right for your circumstances.
What can affect your credit score?
Credit scores aren’t an exact science and credit reference agencies don’t disclose exactly how they calculate your score, but there are several things that could affect whether you have a good, bad, excellent, or fair credit rating.
Your credit history
If you’ve missed payments in the past, or regularly make late payments on your debts, this will be recorded on your credit report and can negatively impact your score.
Your credit age and types
Having several different types of credit agreement and having managed them effectively for a long period of time can give lenders confidence that you’ll be a reliable borrower.
Your total debt and credit utilisation
If you can avoid hitting the maximum on your credit cards every month and can keep your overall debt relatively low, your credit score may be higher than those who have a high amount of total debt.
Your hard credit searches
Each time you apply for a new loan or credit card, the lender will carry out a hard search on your credit report. This will be visible to other lenders for at least 12 months. Having too many hard searches in a short period of time can make lenders more hesitant to approve a loan as they may worry that you’re relying on credit.
Your address history
A stable living situation could indicate you’ll be a more reliable borrower, which is why having a long address history in one place and being registered on the electoral roll can improve your credit score.
Your debt management solutions
If you’ve struggled to make debt repayments in the past, you may have already entered a formal debt management solution such as an Individual Voluntary Arrangement (IVA), a debt relief order, or even declaring bankruptcy. These will be marked on your credit report and could affect your score for up to six years.
How can I check my credit score?
No matter your financial situation, the more you know, the better prepared you’ll be. Checking your credit report regularly is a great habit to adopt, especially if you’re looking to improve your score over time. As each of the three credit reference agencies will give you a different score – and there’s no way of knowing which one a lender will look at – it’s a good idea to check in with all three.
The good news is that you can check your credit score for free; Credit Karma (using TransUnion data), Clearscore (using Equifax), and Experian all offer a free service. If you need a more in-depth look at your complete credit report, this may require a fee (although free trials are available). When reviewing your score, look out for any mistakes or payments you don’t recognise and be sure to challenge them with the relevant credit reference agency.
Will my credit score affect my loan eligibility?
While your credit score isn’t the only factor that lenders consider, it can affect whether you’ll be eligible for finance. Those with high credit scores are generally thought to be less likely to miss payments or default on a loan, which may improve their chances of securing an approval and potentially get a lower APR. A bad credit score poses more of a risk and so may limit the number of lenders willing to approve you, but it’s not impossible to find a loan if your credit score needs some work.
What if I have no credit history?
If you’ve never had any type of credit before, you might expect this to count in your favour with prospective lenders. Unfortunately, the opposite is often true. When you have no credit history, you’re something of an unknown as the lender can’t predict whether you’ll be able to keep up with your debt repayments. This ambiguity can make lenders more reluctant to lend to you.
Keen to find out how tackling your debts could help you improve your credit score? Our friendly team of experts is here to help. Give us a call on 0161 8260 585 or send a message here