In this comprehensive guide I’ll show you what you need to know about credit scores and how they are intrinsically linked to financial products and services such as loans, credit cards, utility bills, pay later credit, mortgages, insurances, and I will also provide you with tips on how to engage with credit information. I’ll cover the following:
Credit score defined
Types and range of credit scores
How is a credit score calculated?
Let’s dive in
Chapter 1
What is a credit score?
Your credit score is a way for a financial lender or creditor to ascertain how likely you are able to pay back credit on time and in full. It is the primary factor whether you get credit, whether to extend credit to you and determined by what terms. Your credit score is not just limited to financial institutions. Companies such as utility firms, home or car insurance, mobile phone contractors, landlords, letting agents, employers (limited information only) and credit reference agencies use credit scores to analyse information about your credit behaviour from lenders and creditors.
In a report conducted by the Financial Conduct Authority (FCA), it looked at how consumers accessed their credit report information. Mainly through the three independent credit reference agencies Equifax, Experian and TransUnion, these credit information providers, could allow you to check your credit file as well as your credit score. The report also found that consumers could access their credit score with agencies offering credit checking tools (CCTs). Other agencies offered other services, such as price comparison, advice guidance and fraud protection.
Your credit file contains your credit score, personal information about credit accounts, payment history, outstanding balances, and credit limits. It will also include information about your public records such as county court judgements.
Chapter 2
Credit score factors
A credit score is a number assigned to you based on your credit history over the past 6 years. If you have a perfect report, with a high credit score, you’ll find it very easy to borrow credit with high favourable terms. But if your report is blemished, you will have a low credit score and you will find it difficult to find lenders to provide you with credit. The FCA report revealed that consumers had a low level of understanding of their credit files and credit scores, with misconceptions about how credit information works, such as believing in a “credit blacklist” or thinking that checking their own credit report will damage their credit rating.
Well, I’m here to dispel the myths. The credit reference agencies will base their score on the information that is held in the credit report, but the scores maybe different based on how they analyse the information, and considers how much weight they assign to certain factors such as:
Your payment history. This will show whether you have paid your bills on time and in full every month. This is the most important factor. It is responsible for about a third of your credit score, as it reflects your reliability and responsibility. Your payment history will include loans, credit cards, mortgages. The main thing that creditors want to know is whether you can pay them back on time and in full.
Outstanding balances or credit utilisation ratio. As a factor, this also makes up about a third of your credit score. The report will reflect how much of your available credit you are using across all of your accounts. For example, if you are provided with £10,000 credit facility and a total balance of £3000, your credit balance will be 30%. Generally, a lower percentage is better for your score as it indicates that you are not overreaching yourself and that you are not relying too much on credit.
Length of credit history. This shows how long you have been using credit. The longer your history, the better your score and it demonstrates experience, reliability and responsibility.
Type of accounts that you have. Having a mix of different types of credit will show how capable you are at managing various forms of debt whether revolving such as a mobile telephone bill or an instalment for repayments of loan.
Recent credit activity. This shows how often you apply for new credit or make changes to your existing accounts. Making too many hard applications for credit or accounts can lower your credit score and it might suggest that you are desperate for credit or facing financial difficulty. Most hard searches will stay on your credit report for up to 12 months.
Chapter 3
What is a good credit score?
How a credit score, is calculated, there’s no conclusive answer. However, as a general rule as different lenders and creditors may apply different criteria’s and expectations, the credit reference agencies will scale your score. The higher your score, the better your chance of getting approved for credit and on more favourable terms for higher limits, lower interest rates and fees.
Experian credit scores range between 0 to 999, Equifax 0-700 and TransUnion 0-710. If you have no active accounts on your credit report, your score will be 0.
CREDIT SCORE BANDS
As you will see, each credit reference agency has its own range and definition of what it constitutes a good or excellent score. You can use these bands as a rough guide to see how you compare. Your understanding of credit information will affect your behaviour in various ways. If you are more aware of your credit information you are more likely to shop around for credit products and negotiate better deals. If you are less aware or have a lower credit score you may avoid applying for credit or resort to high-cost credit options.
Now its your turn
There you go, my guide to understanding what a credit score is, how to access your credit score, and how it is linked to your financial history in terms of credit borrowed, repayment, reliability and responsibility. What practical tips have you found useful for interpreting your credit information?
Alternatively you can contact us below if you are looking for help with auditing your credit report
Winnie Onyekwere
Mediator LLB LLM
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