How2: Get Clued Up On Credit Scores. The 3-Digit Number You Should Care About.
‘Sorry, your credit application has been declined’.
This is the last thing you want to hear when applying for a mortgage for that dream house or trying to open a new phone contract. Do you have a parking fine from 3 years ago that you haven’t paid? Do you have an overdue Klarna payment from all your quarantine ASOS orders? Is there a phone bill from 3 months ago that you need to settle? All these things affect your Credit Score!
Disclaimer: I’m not in any way a financial expert but here are some key facts about Credit Scores that you might find useful as you start to think that brand new car you want on finance, or if you’re like me trying to move out of your mum’s house soon and get a mortgage!
First off, let’s talk definition.
‘Credit is the ability to borrow money or access goods or services with the understanding that you'll pay later.’
Your credit score shows your ability pay back your debts or ‘credit’, based on your financial history. Credit reference agencies like Experian, Equifax, TransUnion will calculate a score for you. This score is then used by lending companies to assess how low or high risk you are when applying for credit. A higher credit score means you are lower risk and more likely to pay back the credit.
What is a good score you might ask. The truth is there is no magic number, different lending companies look for different things in their potential customers. Different credit reference agencies use different score ranges also, I know, as if the world of credit wasn’t complicated enough! For example, Experian provide a score between 0-999, with a score between 881-960 being a good score, TransUnion use 0-710, with 604-627 deemed as good. My advice is to check your score with all three agencies as lending companies may use your score from one or all three agencies. Keeping a good score leads to higher chances of getting credit applications accepted.
Here’s a useful wesbite with all the score ranges for each agency - https://www.totallymoney.com/free-credit-report/good-credit-score/
A whole raft of things can affect your credit score. Here’s a few big things that can affect it:
Your payment history (including missed or late payments)
How much you currently owe and how much of your available credit you have
Outstanding fines or debts (i.e. parking fines)
Registration on the electoral roll (i.e. are you registered to vote)
Length of your credit history, a long credit history shows stability and that you’ve been trusted by other lenders for a long period of time
How much new credit you have - if you have made a lot of recent applications for credit, you are likely to be a greater risk customer
Some misconceptions about credit scores: Your income or employment status has no direct impact on your credit score. Someone with a high salary or savings may still find it difficult to get credit if they have lots of debt or a history of missed payments. However, your income will matter when you apply for credit with a lender, as they want will want to assess if you can afford it, they view Credit Score and Income separately.
Student loan repayments also do not directly affect your credit score and won’t show up on any credit reports, as they are deducted from your income automatically. However, some lending companies may consider your student loan when assessing applications for credit i.e. a mortgage.
Subscriptions like Disney+, Netflix and Spotify do not affect or improve your score as much as you think especially if they’re paid through a normal Visa Debit or Mastercard, typically you can cancel them at any time. Although it is a contract, it is not as contractual as a phone contract or utility bill. If you miss a payment for your subscription, the platforms will typically just stop their services until you pay your fee. However, if you link your subscription payments to a credit card then pay off the credit card every month, subscriptions can help build credit in that way.
You’re probably thinking now, where do I even begin!
You should first check your score by signing up to one of the credit reference agencies. It takes a few minutes to sign up and the agency will ask for your personal details and some questions on your financial history to create a credit report, don’t worry these agencies are secure and safe!
My personal favourite is Credit Karma https://www.creditkarma.co.uk/ who get their scores from TransUnion. Credit Karma is completely FREE and will provide you with a full report updated weekly. A useful feature is the colour coding in the corner which indicates whether the factor needs improving. You can also download the Credit Karma app, which is super easy to use, and you always have quick access to your score.
Experian are also really good https://www.experian.co.uk/ they offer free sign up for a basic credit report which is updated every 30 days. You can also sign up to a free trial for the premium account for 30 days for a full detailed report. An app is also available.
Equifax offer a 30-day free trial only then a monthly paid subscription.
It’s good to check your score with different agencies!
Now you’ve signed up and received your score, there may be some improvements to be made. Here are few tips to improve your credit score:
Clear any outstanding debts you have on your credit report. You might have a debt you’ve forgotten about from 2 years ago; you should try to settle this as soon as possible.
Try not to open too many credit cards or apply for lots of credit in one go. If you make lots applications in a short period of time, it will negatively impact your score.
If you don’t have any credit at all, it’s good to get some like a utility bill, a phone contract or even having a credit card. It’s about time you put that phone contract in your name and not your mum’s!
If you have a credit card, keep utilisation of your credit card under 50-75%, typically keeping it under 30% is most ideal i.e. if you have a limit of £1000 try to only use £300 or less. If you are using more than 75% of your credit limit, this is a ‘red flag’ on your credit report and is likely to a negatively affect your credit score.
An interest free credit card will help to boost your score if you pay it off in full every month.
Don’t close any credit accounts you’ve had for a long time, lenders like customers who have a long credit history. The age of your credit account shows your stability and trustworthiness with credit (A separate blog all about Credit Cards will follow soon!)
This sounds obvious but pay things on time! Try to set up direct debits so you don’t miss any bills. A one-off late payment won’t affect your score, but multiple late payments will!
If you use companies like Klarna to pay for purchases, make sure you pay it back when it’s due.
Pay off any fines. Even if you were wrongly fined, ignoring it will do you more harm than good. Appeal any fines if you must but never leave them unsettled or unresolved.
Register on the electoral roll (i.e. register to vote) which helps to prove your identity to avoid fraud or identify theft.
Check for any fraudulent activity on any of your accounts or errors on your credit record. If you find any errors, report it to the agency to get it removed.
The key thing about improving credit is balance. Having no credit history can make it difficult for lending companies to assess you. You want to have some credit but not too much, enough to prove to lenders you can borrow and pay back, it’s a difficult balance to get right but with some good money management and discipline you will get there.
That’s it! That’s all the tips and facts I have for you, hopefully now you’re a bit more clued about Credit Scores and you’re one step closer to getting that credit you need for whatever reason. One thing to remember is don’t get too obsessed with your score or feel demotivated if it’s currently not a good one, these things take time and patience to build and there’s no one perfect strategy, it’s rare to have a completely perfect score so keep that in mind!
“If you don't take good care of your credit, then your credit won't take good care of you.” ― Tyler Gregory
Aims
(or as Sof likes to call me Finance Queen)