Understanding the nitty gritty details of credit scores is no mean feat, with most people relying on knowledge that’s part fact and part myth. Whether you avoid checking your credit score in fear of negatively impacting it, or you just want to know how to improve your credit rating, we have outlined everything you need to know.
What is a credit score, and what is it used for?
A credit score is a number each person ‘earns’, that’s a reflection of their financial history and behaviour. It’s used to determine the risks associated with an individual when they apply for a loan, credit card, mortgage or service.
The number ranges from between 0-999 and will differ slightly according to which financial agency runs the report, however the higher the number, the lower risk someone is perceived to be, and the more likely they are to be approved for credit. It indicates that they have a history of managing their money wisely, with the capacity to make repayments.
What is a good credit score?
Credit scores are generally run by one of three agencies: Equifax, Experian and TransUnion. The score given to each individual will fluctuate according to the agency, and they will each have their own rating for what’s considered “good”. Currently, good ratings for each credit agency start at:
- Equifax – 670
- Experian – 881
- TransUnion – 604
How is it calculated?
Every lender has a slightly different criteria for what they’re looking for when approving credit requests. It usually boils down to the information from your credit report and the current information they have on you, both from their own records and the information you included in your application. From there they will calculate their version of your credit score, in general the higher the score, the more likely you are to be accepted for credit.
What isn’t included?
It may feel like your whole financial history is on offer when applying for credit, but that isn’t the case. Certain things won’t flag up, including:
- Current account balance
- Salary
- Savings account
- Student loan balance and education history
- Criminal record
- Medical history
- Fines incurred through driving
- Council tax arrears
- Buying habits
- Child maintenance
- Marital status
Of course, lenders will request some of this information during the credit application process, however the details needed will differ for each application. It is worth noting that lenders can’t see previous declined applications, however they can see if you have applied and can guess accordingly.
Should I check my credit score?
The short answer? Yes!
At the very least you should check your credit score annually, and certainly before applying for credit. There is a common misconception that checking your credit score will negatively impact it, however this is only for a hard search, which is a more in depth look a lender will take into your finances. If you conduct your own credit search it has the benefit of allowing you to see whether you have room to improve your credit score, or even discover any mistakes or issues that may flagged up that need to be rectified.
I took a payment holiday during the pandemic, will this impact my credit score?
According to the proposals from the Financial Conduct Authority, any stalled payments that are a result of an agreed payment holiday up until the 31st January 2021 shouldn’t count as a missed payment on your credit record. These will have been agreed and applied for between March 2020 and the end of October 2020.
However, if you applied for more than two payment holidays, or if you had one but have a lower credit score already and had to received ‘tailored support’ from your lender, it may show up on your credit report.
How can I improve my credit rating?
There are lots of things you can do improve your credit score, we have outlined them below for you. It’s important to note that it isn’t something that happens overnight, some of them are quicker to action than others, so be prepared that it might take some time to get your credit rating where you want it to be.
- Register on the electoral roll – When carrying out a credit check, being registered on the electoral roll at your current address enables lenders to confirm your identity, improving your credit rating.
- Build up a credit history – Having no credit history can be a point of pride as it means you have no debt, however it can actually harm your credit score. If there is no record confirming you can manage debt, it makes it harder for companies to provide you with a credit score, resulting in a lower score.
- Personal credit scores vs business credit scores - They are two separate things but possibly could affect each other. This is important when thinking about finance in both situations.
- Ensure all your outgoings are paid on time and in full each month – This is a great indication to lenders that you can handle your financial responsibilities. On the other hand, not keeping up with your payments - whether they’re late or missed entirely - will result in a lower credit score.
- Use, but don’t abuse, your credit card – Lenders assess your credit utilisation according to the percentage of your available limit you use. They want to see that you can manage your credit, without overspending. The optimal credit utilisation is 25%, meaning that if your credit limit is £2000 try to only use around £500 of it.
- Avoid making too many credit applications – Every time you apply for credit it’s recorded as a hard search on your credit report, if you apply too often then you are seen as someone who could be borrowing more than you can afford, making you higher risk.
- Use it or lose it – If you have accounts you no longer use it’s important to close them. Leaving the balance at zero can indicate that you can’t manage the credit available to you, leading lenders to believe they shouldn’t give you more.
- Don’t overextend yourself – Borrowing so much that you end up with a CCJ, IVA or having to declare bankruptcy, can have a long-lasting negative impact on your credit score. Any credit search carried out for the next 6 years will flag it up, making you extremely high risk.
- Be mindful of joint finances – Any joint account, mortgage or loan ties you to another person, not only in terms of your financial responsibilities, but also to their credit history. If their credit score is low, it can impact how risky you appear too.
- Don’t use your credit card to withdraw cash – Not only are the interest rates high, but in the eyes of lenders it also reflects poorly on your ability to manage your money.
- Pay for insurance in full – When you take out insurance and pay it in monthly instalments, lenders consider you to have a high interest loan. It will also count as a hard check from the company when initially taking it out. By paying it in full you avoid having it on your credit file.
If you’re considering the benefits of utilising our registered office address and would like any further information, or require access to our credit checking service, please call 01322 555442 for a 'no obligation' chat, or email our resident credit expert rebecca@bluerocketmortgages.co.uk.
Blue Rocket Accounting provides tailored accounting and bookkeeping support to businesses across Kent including Dartford, Bexley, Sidcup and Maidstone, helping to put them on course to reach their full potential.
The information and data in this article was correct at the time of publishing and every attempt is made to ensure its accuracy. However, it may now be out of date or superseded. Blue Rocket Accounting make no representation or warranty of any kind regarding the content of this article and accept no responsibility or liability for any decisions made by the reader based on the information and/or data shown here.
