22nd December 2020

What is a credit score?

A credit score is a tool used by companies that lend money (lenders) to help them determine how likely an individual is to repay them on time and in full. It helps lenders decide:

  • Whether to lend to you or not
  • How much they are prepared to lend to you
  • How much interest to charge you

Generally, the higher your score, the lower the risk you pose to lenders, making it more likely that they will accept your application for credit at a reasonable rate of interest.

While each lender has their own scoring system, the one thing they have in common is that when you apply to borrow money from them, they will ask permission to obtain your credit report through a credit reference agency (CRA) to help determine the score they will give you.

What does a credit reference agency do?

A CRA compiles credit reports. The UK’s three main CRAs are Experian, Equifax and TransUnion.

Your credit report enables a lender to:

  • Check you are who you say you are
  • See how you’ve managed credit in the past
  • See how you’re managing credit at the moment

You should be aware that missed or late payments stay on your report for a whole six years.

CRAs can provide you with a credit score for a fee. This score is based purely on the information they hold. Their criteria may not be the same as the lender you’re hoping to use and so this may not be as useful a service as it first appears.

Why does my credit report matter?

You can’t take out credit until you’re 18. Chances are, your first credit check will be in connection with having a mobile phone contract in your own name.

Once you have that contract, it’s really important that you make your monthly repayments on time as they’ll be recorded in your credit report. Even if you have no plans to borrow money in the immediate future, both letting agencies and private landlords use credit reports to assess your suitability as a potential tenant. So, if you’re thinking of leaving home and renting, be sure to keep your payments up-to-date.

What affects my credit score?

There are a number of factors that can reduce your score including:

  • The amount of debt you already have
  • Missed or late payments
  • A high number of previous credit searches
  • Not being on the electoral roll (a list of names and addresses of those who are registered to vote) or moving around a lot
  • Living at an address where other people have a bad credit history
  • Being a victim of fraud

How can I get (and keep) a good credit score?

  1. Make sure you’re registered on the electoral roll. This will enable the lender to confirm you live where you say you live.
  2. Before applying for credit, go online and check your credit report. All CRAs must provide you with a copy of your report for free on request. If you come across any mistakes in your reports, contact the relevant agency and ask for it to be corrected.
  3. Only take out the smallest amount of credit you need when you can afford to, so that you can make your repayments on time. If you do find that you’re struggling to repay, get in touch with your lender as soon as possible to see if they can help.

And finally, avoid credit repair companies. These are companies that attempt to persuade people that there are secret strategies and little-known tricks to help increase their credit score. These firms charge an upfront fee for their services, but you can easily do the work involved yourself for free by following the three steps above.

With thanks to our partners over at the NMBA for content.

Up next week – INVESTING MONEY!