What is a credit score?
Your credit score is a number ranging from 300-850 that deciphers how much credit a consumer is allowed to borrow, based on your financial history. The better your financial history, the higher your credit score will be, meaning more attractive lending rates for the borrower. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner. Your credit score can move up or down over time depending on how you manage your finances.
Why is it important to have a good credit score?
If you have a good credit score, you can save yourself a lot of money on large interest rates, because your hard-earned credit rating will give you access to cheaper rates and deals on credit cards, loans, credit agreements and mortgages, which helps bring down the overall cost of borrowing. Your credit score can also affect your chances of getting a monthly phone contract or the option to pay monthly for your car insurance or home insurance.
What are credit scores used for?
Lenders will take a look at your credit score before lending you money. Each lender differs and you will be given your credit score based on each lender’s own criteria and assessment. They all set a minimum score you need to reach to be eligible for the credit you’re applying for.
If you score under a lender's threshold, they may decide not to lend you the money, or may charge you more to do so. Some lenders specialise in loans for riskier customers and may offer credit where another bank might not.
Lenders don't have to tell you what your score is, or how they worked it out – but they should give you a basic explanation of how scoring works, and whether your application has been refused because of your credit score or your credit report. They should also tell you which agency they used, so you can correct anything that is wrong in the report.
What factors can affect your credit score?
Several factors can affect your credit score, including:
Your payment history
Whether you’re registered on the electoral roll
Late payments: If you are late or you miss a credit card payment or a loan repayment, it will show up as a bad mark on your credit file
Minimum payments: You could also find that your record is tainted if you make only the minimum payments each month, as it suggests that you are struggling to manage your debts
How much you owe and how much of your available credit you are using, often called ‘credit utilisation’ by lenders
The affordability of what you’re asking for, given your earnings and the amount you owe
The length of your credit history
How much new credit you have - if you have made a lot of recent applications for credit, you are likely to be a greater credit risk
If you’re worried about a low credit score or want more information on how to improve yours, get in touch with a member of our team today.