The Credit Score

In this article, we talk about what the credit score means, how it affects you & tips on how you can improve it. For more information on this & other financial topics, we highly recommend checking out our Finance Homepage!

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Why is looking after your credit score important?

  • Lenders: your credit score is used by lenders as a pass/fail decision-making tool on whether to lend you money, give you a credit card or even allow you to have a phone contract. 
  • Building: To build a good credit history takes a long time, however, even one missed payment can cause significant detriment to your score. It takes significant time and effort to try and recover the health of your credit score. In this case, prevention is far better than cure.
  • Interest rates: If your application for a loan is accepted, your credit score and dictate how favourable the interest rate you pay on that loan is. For example, credit cards aimed at those with a poor credit history have very high interest rates as lenders are trying to mitigate the risk of missed payments by charging more interest. 

Why does this matter?

We will all need credit at some point in our lives. Our phone contracts, credit cards, mortgages and car leasing are all examples of loans/credit that we may incur. All of these applications being successful depend on having a good credit score. The prudence and care we take to manage these accounts and ensure we pay on a timely manner will also influence our credit score going forward. 

What is a good credit score?

There are three main credit reporting agencies used by the majority of lenders in the UK; Experian, Equifax and TransUnion. The different agencies have slightly different scales, for example, Experian scores from 1 to 999. The higher your score, the better it is. Those who have a score of 800+ are deemed to have an “Excellent” credit score. 

Different lenders will decide on their thresholds of credit score that they will accept for an application. The way they weight different factors of your application will vary and it is almost impossible to find out these calculations. The safest way to maximise your chances of having a successful credit application is to have as good a credit score as you possibly can. 

What can you do to improve your credit score?

Before you start, make sure you check what your credit score is and what information is held by the Credit Referencing Agencies mentioned above. Experian, for example, provides a free 30-day period to their service where you can find out your score and download a detailed report on the information they hold on you. (Don’t forget to cancel your subscription before the 30-day free trial ends so you don’t get charged!)

If your score is “Excellent” then make sure everything is accurate on the report and continue doing what you’re doing. It’s clearly working! If your score is Fair/Good etc then there are things you can do to improve your score to maximise your chances of having a successful credit application:

  1. Ensure you are on the Electoral Register for the address that your bank accounts and phone contract(s) are registered in. Having a scattered address history can make a lender think your abode status is unstable, thereby reducing your credit score. 
  2. Check your payment history to make sure it has not recorded any (unjustified) missed or late payments. This history can go back six years; therefore, every little detail is important to check. 
  3. Close any accounts that you are not using. If you have a credit card that you never use, then close that account as your credit score is incorporating it as “current credit” and this will affect your affordability calculation. 
  4. Have a small amount of credit such as:
    • Do your grocery shopping on a credit card and pay it off straight away. Do not use your entire credit limit as this can suggest to the lender that you are not managing your cash flow well. 
  5. Ensure you do not miss any payments on your phone contract. 
  6. If you are doing a large purchase and it comes with 0% credit, use this to help build your credit history and spread the cost so your cashflow looks more consistent
  7. Correct all inaccuracies. This is very important as even the smallest detail may be having a large impact on your credit score.
  8. Allow time! The credit score is an indication of how well you manage your finances over the last six years, somewhat like an HbA1c. When taking any of the actions above, remember that the effect of those actions will take some time to be reflected in your credit score. 

What should I do going forward?

Like with our patients, the key to managing a specific measure is to continue to monitor it. I have tried three apps to keep an eye on my credit score: MoneySuperMarket, ClearScore and Experian. All have been easy to use and helpful. I like ClearScore the most as it gives you your full credit report for free, this way you can see what changes are affecting your score each time it is refreshed (every 30 days). Ensure you are expecting any changes that are going to affect your report or challenge them straightaway to minimise the damage it might cause your credit score. 

References & Resources

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