A credit score is a way of predicting how likely are you to pay off your debts judging from your existing and past repayment habits.
If you want to take out a property or vehicle finance or benefit from low interest rates on credit cards and loans, this article is just for you!
What do you need to know about your credit scores?
When you have a high credit score, lenders are more confident that you’ll meet your repayments. A credit score does not only determine whether lenders will offer you credit, but whether you qualify for the best rates and terms or will have to deal with higher interest rates.
In the UK there is no pre-determined credit score that tells lenders how likely you are to pay your debts, these scores are determined by individual lenders and vary based on the credit reporting agency being used.
Online lenders always set their own minimum credit scores, by using information held on your credit file by credit reference agencies Experian, Equifax, and TransUnion, along with other information they have about you.
The method that is used to calculate your score is individual and will result in some lenders scoring you higher than others, depending on the type of customers they are looking to attract. Some lenders will provide loans to people with an average-to-poor credit score while other require a good credit score for any loan to be considered.
How does a credit score help you?
A credit score gives lenders a fast, objective way to determine your individual credit risk. Before credit scores existed, the credit granting process could be slow, inconsistent and unfairly biased. Credit scores can help in the following ways:
- When you have a good credit score you can get a loan quickly. Credit decisions can be made within minutes which helps lenders speed up loan approvals.
- Credit decisions are fairer. A credit score allows lenders to only focus on the facts related to credit risk, rather than their personal feelings about a certain individual.
- Credit mistakes count for less. If ever, you once had bad credit in the past, credit scoring doesn't let that haunt you forever. A credit score can be changed from worst to great as time goes by.
- More credit is available. Lenders who use credit scores can approve more loans since credit scoring gives them more precise information on which to base credit decisions.
- Credit rates are lower overall. When there are more credit options available the cost of credit for borrowers decreases.
How is a credit score calculated?
Credit scores are calculated by using an applied mathematical algorithm to the information in one of your three credit reports. However, some of the credit scoring models are very common, these typically range from 300 to 850.
Some scoring models consider your payment history on loans and credit cards, how much revolving credit you regularly use, the types of accounts you have and how often you apply for new credit as well as how long you've had accounts open. Any judgements or loan applications made are also taken into consideration.
Improve your credit score
Firstly, before improving your credit score, you should know your current score. You can receive a free copy of your credit report one a year. Simply visit the credit reporting agency's site and apply for your free copy. Highlight the factors are affecting your scores the most.
These are the steps you should follow to improve your credit score:
- Pay your bills on time – when lenders review your credit score, they are most interested in how reliably you pay your bills since past payment performance is usually considered a good predictor of future payment performance.
- Get credit for making utility and cell phone payments on time – when it comes to credit scores, it is usually the small things that count. Paying utility and cell phone payments on time is a way for you to improve your credit score.
- Pay off debt and keep balances low on credit cards and other revolving credit – the credit utilization ratio is also important in credit score calculations. For lenders to consider you, your ratio should be 30% or less, and people with the best credit scores often have very low credit utilization ratios.
- Apply for and open new credit accounts only as needed - unnecessary credit can harm your credit score in various ways.
- When applying for credit do not make multiple credit applications within a short space of time. This applies equally to small and large loans such as car and home loans.
The benefits of a good credit score
Although you can live with a bad credit score, it’s not always easy and is certainly not cheap. Deciding to live on a good credit score will help you save money and make your financial life much easier. With a good credit score, you get to experience a lot of things such as:
- Low-interest rates on credit cards and loans – your credit scores also influence the interest rate you pay. When you have a good credit score you qualify for the best interest rates, and you’ll pay lower finance charges on credit card balances and loans.
- Better chance for credit card and loan approval – although having a good credit score record does not guarantee you to be approved for anything, it increases your chances of being approved for new credit.
- You have more negotiating powers – with a good credit record, you can negotiate a lower interest rate on a credit card or a new loan.
Improve your credit score today
The first step to improving your credit score is by cutting the unnecessary things in your budget and use the money to pay your debts. Your credit score should not limit you, it shouldn’t be standing in the way of achieving your dreams.
Start changing how you handle your finances to create a better financial future. You can do this by following our practical advice on how to build your credit score in the UK.