If you live in the UK or US, you may have heard of this term every now and then – credit score.
You’ve heard that it’s important to have a good credit score and that you need to improve it.
But what does this term actually mean, why is it important, and how do you find out yours?
A credit score is a 3 digit number used to determine your likelihood of acceptance for credit.
The higher the credit score, the more likely you are to be accepted for a credit application.
This applies to all credit applications such as credit card, personal loan, home mortgage etc.
Your credit score says how likely you are to pay anything you borrow based on your history.
In this blog, we talk about why your credit score is crucial and what makes a good credit score.
We also talk about how your credit score is calculated and how to improve your credit score.
Finally, we discuss where you can find out your credit score and the steps you can take after.
Why is your Credit Score Important?
If applying to borrow, lenders look at your credit score to decide whether to give you money.
Not only that, but it helps them decide how much they may give you (as well as other factors).
A good credit score gets you approved for many products: credit cards, loans, mortgages etc.
A poor credit score prevents you from accessing these services – it’s not fair but it’s the reality.
There are other reasons why your credit score is important, such as the following scenarios:
It affects your ability to rent: landlords may check your credit score as part of their screening.
It affects your ability to buy: lenders use your credit score to see if you can afford repayment.
Employers may see your credit history: this only applies if your job involves managing money.
It affects your interest rates: having a poor credit score may give you a higher intertest rate.
These are a few reasons why your score is important, particularly having a good credit score.
What is a Good Credit Score?
Unfortunately, there’s no central scoring system in the UK when it comes to your credit score.
Your credit score (the 3 digit number) depends on the credit reference agency (CRA) you use.
There are 3 different credit reference agencies in the UK: Experian, Equifax, and TransUnion.
They hold data about your financial history (credit report) used to generate your credit score.
Each agency has its own system, so your credit score will vary depending on the one you use.
However you’ll find you probably fall into the same category with all of them as shown below:
| Credit Reference Agency (CRA) | Fair | Good | Excellent |
| Experian | 721 – 880 | 881 – 960 | 961 – 999 |
| Equifax | 380 – 419 | 420 – 465 | 466 – 700 |
| TransUnion | 566 – 603 | 604 – 627 | 628 – 710 |
How is your Credit Score Calculated?
There are a couple of factors that are used to determine how your credit score is calculated.
Your credit score is calculated using a points system, based on what is in your credit report.
Your credit report gives a snapshot of how you’ve managed your debts and bills in the past.
For example, if you pay bills on time, this would have a positive impact on your credit score.
However if you miss payments regularly, this has a negative impact on your credit score.
But what if you don’t have a credit card, have never taken out a loan, or borrowed money?
If you have never borrowed money, it’s hard for lenders to assess the risk of lending to you.
That’s why believe it or not, it’s actually beneficial for you to take out at least one credit card.
At first you may have a high interest rate and a low credit amount: that’s ok it’s just the start.
By showing you make payments on time, you are more likely to be approved for bigger loans.
How to Improve your Credit Score?
There are a couple of ways for you to improve your credit score, some of which are random:
The 1st is by registering to vote: this is random but lenders use this to check your details.
The 2nd way is to show your credit history; you can’t do that if you’ve not borrowed before.
That’s why taking out a small sum of credit will help you in the future – if you manage it well.
The 3rd way is to avoid to many applications – this may suggest that you are in a lot of debt.
If you’re just comparing rates, make sure to do a soft search that won’t appear in your history.
The 4th way is to pay on time and stay within your limits – to show lenders you are reliable.
Your 12 month history will be the most important – so make sure to make a good impression.
Finally, beware of joint accounts, as your credit history will be linked to your partner’s history.
If your partner’s credit score needs to be improved have them follow these mentioned steps!
How to Check your Credit Score
The moment you’ve all been waiting for: how do I actually check my current credit score?
After all, if you can’t track your score today, how will you be able to improve it for the future?
You can check your credit score with any of the credit reference agencies mentioned above.
You can check your credit score using Experian, Equifax, or TransUnion using any of the links.
You’ll be happy to know that checking your credit score won’t affect your credit score: phew!
Have a look with one CRA and see what the score is – are you within fair, good, or excellent.
You may find that your score is already excellent and that you don’t to do anything: great!
However, if you find your score needs a bit of work, feel free to follow the guide steps above.
Do you know what your credit score is? Is it what you thought? Share in the comments below.
If there are other personal finance topics you’d like to discuss, let me know in the comments!
