In the world of adulthood, the term ‘Credit Score’ seems like an endless story, so here we are going to explore in detail, so you can get clued up ahead of the game.
Side note…if you can understand your score, how it works and how to improve it, then this brings you onto the first stepping stone to creating a strong, positive credit profile – the way to go!
What is it?
First things first, a Credit Score is a number that indicates your ability to repay any money you borrow, so the attractiveness for lenders in approving your request to borrow money or not.
You do not need to have a credit score but it is advised to and not having one can prevent you from, or make it harder to get, some things at times of need i.e. getting a mortgage and even some jobs!
How is the score generated?
Credit reference agencies have the task of collecting information from various sources, about an individual, that when put together, generate the given three digit score. The five key influencing factors are; payment history, types of credit in your name, recent credit applications (if any), amount of any debt and length of credit history.
Aside from the typical five, other factors that influence are:
– Electoral Register: being listed here could improve your credit score as it is a way of confirming your identity and home address
– Court Records; these need to be checked as if you have any County Court Judgements, Individual Voluntary Arrangements, Defaults or Bankruptcies, this will have a negative impact on your credit score for up to 6 years
– Spending activity: If you have high spending activity and debt, then this indicates your reliance on credit; something less attractive and likely to weaken your credit score
– Joint accounts: depending on the credit score of the person you are sharing an account with, this can impact your score – take this into account when deciding to open a joint account and who with
Understanding scores
Your credit score is variable and changes overtime based on your circumstances i.e. employment and spending activity. Different credit reference agencies i.e Experian, Equifax, will use different grades.
However, the general rule of thumb is that the higher the credit score you have, the more likely you will be able to repay and so you are more likely to be accepted when applying for credit. Data from Experian suggests the average credit score in 2022 was 714 (considered to equal a ‘fair’ rating).
Why do I need a credit score?
You may not have thought of checking your credit score or even having one, but, throughout your life at specific points it will become necessary.
Think about your future…buying a house (a mortgage), a car (car finance), starting up your own side hustle (a personal loan). Any time you will need to apply for credit, lenders and providers will need to check your credit record to check for any risks likely if they offer you credit. Your credit score will also determine the interest rate and credit limit offered.
Aside from lenders, other parties who may look at your credit score would be employers, landlords and insurance companies.
Now do you get why this is a term heard frequently in the adulting world!
Tips to improve your credit score
– Be a sensible spender
– Minimise debt and late payments
– Have a range of credit accounts to your name
– Regularly pay by direct debits
– Set up reminders for any accounts and debts you have…i.e. Student loans, unsecured borrowing forms and even for Buy Now Pay Later accounts; missing an instalment can leave a negative effect
When considering how to improve your credit score, it is important to also address the things that will not affect your credit score, so you do not spend time working on improving unnecessary things such as:
– Benefits status: whether you receive benefits or not is irrelevant in this case and so will not impact your credit score
– Income: your credit report/score focuses on borrowing rather than income. Your income may be asked to paint a financial picture of yourself, but that is all.
– Debit card usage: using your debit card has no impact. However, dipping into an overdraft from using your debit card can have an effect
– Living circumstances: if you live with others and they are on the same housing agreement or payment setup as you, this will not have an impact unless you have a joint account
Next steps
So, hopefully by now you have realised that the aim here is to work towards a high credit score – not just to be able to brag about it! But also to reap the many benefits of a greater likelihood of credit approval.
Take some time out of your day to go and check. It is such a simple process to do – there are many free websites you can use, as well as going to your bank/looking online. A couple of forms and details and hey presto! Your three digits will appear. Stand apart from the 69% of people in the UK who do not know their credit score!
Then it is time for you to evaluate and take action…do you need to improve your score? Or are you satisfied with where it is currently? The sooner you start the better.
You can thank us later.
In respect of the information above, this content is only for informational purposes and does not constitute any kind of financial advice.
