This article is the fourth in a series about managing finances for beginners. You’ve already learnt how to easily set up and stick to a budget, how to get rid of debt and how to borrow money sensibly. Read on to learn about credit scores and how to make sure you have a good one.
What is a credit score?
Your credit score is a number that predicts how likely you are to repay your debts, based on your previous borrowing history. When you apply for a loan, a credit card, or even a phone contract, the company will look at your credit score and decide whether you are a ‘safe bet’ – will you make your payments on time and will they get their money back?
Let’s look at this in more detail…
In the UK there are three main Credit Reference Agencies (CRAs) and each one uses a different scoring system:
- Experian – a good credit score with Experian is over 880 out of 999
- Equifax – a good credit score with Equifax is over 420 out of 700
- Callcredit – a good credit score with Callcredit is 4 out of 5
All CRAs keep track of your credit score and hold a credit report containing information such as:
- The credit accounts you have and any missed or late payments
- People who are financially linked to you, if you have taken out joint credit for example
- Records of any repossessions, bankruptcies, etc
- Detail of any overdrafts you have
- Personal information such as your date of birth, whether you’re registered to vote, and your current and previous addresses
How is your credit score calculated?
Your credit score is based on a number of factors, including:
- Your payment history – do you pay your bills on time? Have you had any serious payment issues such as debt collections, repossessions or bankruptcy?
- Whether anyone financially linked to you has a bad credit rating
- How much debt you currently have and how much of your available credit you are using
- How long you have had your debt – it is actually better to have an ‘older’ and well-managed credit history than no history of borrowing at all, because it shows you’re experienced at borrowing (as long as you’ve been paying your bills on time)
- How many different types of debt you have – again, it works in your favour if you are experienced with having many different types of credit, such as a mortgage, a credit card, a car loan, etc.
You can check your credit score for a small fee directly through one of the main credit reference agencies, and they will send you a paper copy. You can also check it for free online using ClearScore, MSEs Credit Club or Noddle.
Easy steps to improving your credit score
1. Pay your bills on time! And try to pay more than just the minimum payment
2. Register on the electoral role – this makes it much more likely that you’ll be approved for credit
3. Check your credit report and check for any mistakes, such as the wrong address or phone number
4. Make sure you’re not linked to another person with bad credit, such as through a joint account or mortgage. Inform the credit agencies if you have separated from your partner, for instance.
5. Reduce the amount of existing debt you already have – read how to do this here.