Applying for a mobile phone contract, a mortgage, or even a credit card and confused by your credit score? We've got everything that you need to know so that you can understand exactly what your credit rating is and how it works.
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Your Credit Score: The Basics
Essentially, a credit score isn't complicated. All it is is a score that tells a company if you're a good financial risk or not. A person with a good credit score has shown that they're financially responsible and can pay bills, or pay back debts on time, and a person with a bad credit score is exactly the opposite of that. Of course, things can't be quite that simple, can they?
The first thing that you need to know here is that there is no one single credit score. Different companies score you in different ways, and there are three major UK agencies that provide credit reports to companies. Those three reports might not match! Secondly, different lending companies look for different things in a customer, and just because you pass a credit check with one bank, for example, doesn't mean that you'll pass with a different bank.
Getting credit based on your credit score can vary between different companies, and can also vary depending on what it is that you want to buy (you may get approved for a car payment plan, but not for a mortgage, for example). And even if you have a great credit score you might not necessarily get approved for credit. Companies are free to lend money to anyone they wish, and they don't have to lend to you, no matter how great your credit score is.
What Can Affect Your Credit Score
When calculating your credit score, companies take several things into account:
- Late/Missed Payments: if you have made payments late or missed payments completely for other purchases (credit card payments, mortgage payments, phone bills, etc.)
- Financial Legal Problems: this may be a bankruptcy declaration, or it could be a company taking you to court because you've failed to pay something.
- Lots of Credit: if you're borrowing a lot (maybe you have multiple credit cards, or multiple loans) then companies might think that you're at risk of not being able to pay back everything that you're borrowing. This is why it's generally better to transfer all your debts to one or two major companies (particularly with credit cards) rather than having lots of open accounts.
- Lots of Applications: if you're applying for credit a lot and being turned down then companies are less likely to give you credit (after all, if everyone else is turning you down, there must be a reason, right?).
- Moving House: if you move house a lot then companies become worried that you're not financially stable, and that they might not be able to find you if your bills go unpaid.
- Mistakes: mistakes do happen and if your credit report shows something that's not true (like a missed payment that you really didn't miss, or even a misspelled address, name, or wrong phone number), then your ability to get credit could be affected.
- No Credit History: if you're young, or have just moved to the UK, then you might not have any credit history. This essentially gives you a low credit score simply because there's no proof that you can pay back a loan on time.
What Can't Affect Your Credit Score
However, there are also some things that aren't reflected in your credit score:
- Personal Information: anything related to your salary, your race or religion, or your medical or criminal history
- Money in Savings: the balances of savings accounts or investment accounts are not included.
- Certain Financial Information: a credit report does not contain any info relating to child support and does not contain info relating to student loans taken out after 1998.
- Car Fines: no information relating to driving penalties or parking fines appears.
- Old Financial Problems: Missed payments or defaulted loans are usually wiped from your credit record after six years.
- Relative's Finances: unless you hold a joint account, joint credit card, or co-signed loan, there's no info about the finances of any of your family members or your spouse.
Checking Your Credit Score
You can check your credit score from any (or all) of the three major UK credit agencies: Experian, Callcredit, or Equifax. By law these companies cannot charge you more than £2 per report, though many will give you your report for free.
Checking your credit report is a great idea. You can check to make sure all the information is correct, but you'll also get a head's up on what other companies are seeing when they run a credit check. And if you find that your credit report isn't as good as you like, then you can take steps to improve it, and therefore improve your chances of getting approved the next time you apply for credit!
