What is a Credit Score?
A credit score is a 3-digit numerical value assigned to you by lenders to determine the level of risk involved in lending you money, also known as your creditworthiness. It is calculated from the information held on your credit file, which is a summary of your credit history.
What type of information is used for my credit score?
The following segments of information are used in conjunction with each other to calculate your credit score:
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.
It is important to note that information related to balances of any current or savings accounts, bankruptcies that are over 6 years old, written off debts over 6 years old, gender, ethnicity, religion, political affiliation, medical history or criminal records are not taken into account.
What does my credit score look like?
Your credit score is a numerical value assigned to you based on algorithm which crunches the details listed above. You can access your credit score from one of the three main credit reference agencies in the UK and the score ranges from 0 to 999.
Different agencies will provide different scoring models with a differing maximum limit. The credit score that is available on your MyCreditMonitor report goes up to 700.
Some credit reference agencies will also quote you a simpler credit rating figure between one and five.
In all credit scoring models the principle is the same and is rather straightforward. The higher your score, the less of a risk you are to lenders and the easier you should find it to receive credit while the lower your score, the more risky you are deemed to be hence you are likely to be either offered very high interest rates or denied credit altogether.
If I never borrow money will I be given a high credit score?
On the face of it, it may seem logical that the absence of a history of bad debt repayments might lead to a good credit profile.
However, the absence of a borrowing record creates a vacuum of information about you that works both ways. If lenders have no evidence that indicates that you always repay on time, how can they be sure how you will behave once you have access to lines of credit?
Why are credit scores so important?
Nowadays, access to lines of credit at an affordable rate has become an issue that can affect the quality of life.
A good credit score can help gain access to a confident and flexible financial future while a lower credit score can feel like a financial straitjacket, restricting opportunities to use the different financial products on the market, such as credit cards and loans.
Can everyone see my credit score?
No. Your credit score is only available to parties undertaking a credit check, such as employers or landlords or organisations making a lending decision about you.
You also have the right to monitor your credit score and credit file, but it is important to note that the credit score supplied to you by a credit reference agency may not be the same as the credit score calculated by a lender.
This is because each lender has a specific type of customer in mind when they undertake their risk-benefit analysis on consumer-lending decisions. They know how their own profit model operates.
Similarly, different thresholds exist for different financial products. So, those products seen as more of a short-term commitment, like a credit card or a personal loan, are likely to have a lower threshold than a mortgage application, which is clearly a more serious and long-term commitment.
Can I still be refused credit with a high score?
It is important not to view your credit score as an instant passport to credit.
Of course, learning that you have a high credit score is great for your confidence and peace of mind and you can do this for free right now by accessing your free report from MyCreditMonitor but always remember - lenders, especially the large organisations, will use their own confidential methods.
Knowing your credit score does however put you in a strong position because now you are able to make informed decisions about your likelihood of being approved for credit. Not only can you evaluate whether it is worth making an application at a particular time but you can also adjust any behaviours, which may have a negative impact on your credit score.
This is hugely preferable to simply applying for credit in the hope that the outcome will be successful because applications that are turned down tend to lower your credit score.
What is a good credit score?
While the different credit reference agencies and lenders might use different systems, generally credit scores can range between 0 and 700. A score above 609 is considered to be 'excellent' whereas a rating below 588 will be judged as 'poor' and carry the associated financial consequences in relation to credit.
How can you build a good credit score?
The best thing you can do to have a high credit score is to always pay your bills on time. This is because a single late payment can have a detrimental impact on your credit score.
As a guiding principle, if you're able to display behaviour that consistently demonstrates financial responsibility, this will be good for your credit rating.
Educating yourself about credit scores and giving yourself the same access to your credit file as lenders have, certainly puts you on the right track for managing your personal credit requirements.
What's Your Credit Score?
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