First things first, let’s start with the basics:
What is a credit score?
Your credit score is essentially how likely you are to pay back credit. When a lender looks at your credit history, they are looking at how much of a liability you are, whether you are a financially trustworthy and what level of risk you are. If you have a good record of on-time payments then you are likely to have a high credit rating: the higher the better.
Conversely, if you regularly make late payments or have arrears, then your credit rating will be on the lower end.
Credit history is taken into account for many different things, including:
- Credit cards
- Bill payments
- Car finances
The aim is to have as good a credit score as possible: the higher the score, the better loans, insurances and deals you are likely to get.
How is my credit score decided?
These three agencies collate as much information as they can about your credit history and use this to decide your credit score.
A good credit score:
Your credit score is a result of various factors which are all taken into account to create your credit report.
Here are a few of those factors:
- Public records; such as electoral rolls, etc.
- Previous credit searches
- Credit payment history
- Current credit cards etc.
This information is collated and taken into consideration as part of reaching the final credit figure.
What can affect my credit score?
Your credit score is a flexible figure which fluctuates depending on your financial loyalty. Taking control of your financial behaviour is key to getting and maintaining, a strong credit score.
Here are a few things to be aware of that can affect your credit score:
- Your financial history plays a large part in the final decision of your score. If you have a bad record of not paying bills on time, then this will reflect badly on your report.
- Alternatively, if you have a small history then this can also be held against you; having little information about your financial behaviour means that you are potentially a higher risk to lenders, as there is no proof of your liability either way.
- Keep on top of payments and you can build a good score, as well as keeping a squeaky clean history which will only look good to potential lenders.
- If you make lots of applications for credit it can make you look a little desperate and suspicious to potential lenders. Each application stays on your record for a year, so try and keep those applications down so your credit score can stay up.
- No, it doesn’t matter if you are conservative or liberal. Your place on the electoral register gives lenders a proof of address and confirmation of your identity.
- Keep your balances low; it proves that you are a low risk to potential lenders, as you pay off credit and keep up-to-date with your payments.
- Try not to move house too often, or change jobs. Stability is a good attribute in the eyes of a lender.
Your credit score is not affected by things like; sex, religion, age, salary, location etc. Lenders may take into account factors such as salary when considering loan applications, but your credit score will not change because of these circumstances.
Remember: A good credit score does not mean you will get credit or good interest rates. These are dependent on the lender.
Each lender has its own specifications for credit. So if you are rejected by one company, you might still be accepted by another. But it is important to find out why you were rejected, or at least check your application for errors.
So why is my credit score so important?
If you have a bad credit score, more often than not, you can say goodbye to most mortgage providers. If your application is approved, then your credit will be directly impacted by your monthly payments and subsequently affect your interest rates. It all goes around in circles really.
But if you can’t afford to buy a house, you are still not free from credit checks. Many landlords and letting agents now require credit checks from potential tenants. They want to ensure that tenants are going to frequently pay their rent, otherwise, they are a risk to the landlords’ rental income.
You can also make your rent payments count towards your credit score. Simply sign up for RentScore and your on-time payments will be rewarded with an improved credit rating.
Find out more about RentScore here.
Many of us are not able to pay upfront with cash, and therefore we require loans to pay for purchases such as cars. Car loans are significantly smaller than mortgages, however, they work in a similar way. A lower credit score means a higher interest rate and a larger deposit. Furthermore, as previously mentioned, regular payments will positively affect future loans.
Employers frequently run credit checks on potential employees. A positive credit check proves that you are financially responsible and is often taken into consideration for promotions, as well as new jobs.
This one often comes as a shock to some people. But yes, utility bill companies often require credit checks so they can establish your account. Think of it as a loan, they are loaning you their electricity and they expect you to pay them through regular on-time payments.Even things like mobile phone contracts require good credit scores.
These bills work both ways, as much as they require you to have a good credit score, they also affect it. If you continue to make regular payments then it can improve your score and, subsequently, impact your future deals.
Circle of Credit
The good thing about your credit score is that it isn’t fixed. It is a fluid figure that can rise and fall, all depending on your financial behaviour. And it isn’t too late! There are always ways you can improve your credit rating and your chance of landing your dream job, whilst living in your dream home.
Don’t underestimate the importance of your credit score, but also don’t feel disheartened if that score is low. You can always amend your finances, and with so many ways to alter your score, and with different lenders using various specifications, you are always likely to find something that works for you.