What is a Credit Score and Why Should You Care?
You have probably heard that your credit score is important, and that you should keep track of it. But does your credit score really impact your daily life, and does it actually matter? The short answer is yes – your credit score can not only affect your chances of getting loans and credit cards, it can also have bigger repercussions. So what is your credit score, and how do you find yours?
What is a Credit File?
Before we can really discuss your credit score, it’s important to first understand what your credit file is. While the two are linked, they are not the same thing at all. Your credit file, or credit report, primarily contains details about your credit history from the last six years.
This information is supplied to credit reference bureaus by the financial institutions you borrow from, such as banks, building societies, credit card companies and short term lenders. Generally, they’ll send across a report once a month, which will advise the status of your account with them, like whether your payments have been made on time.
The three main credit reference agencies in the UK are Equifax, Experian and TransUnion, and each of these bureaus have a separate copy of your credit file. To check yours out, you may be able to sign up for a free trial, or you can pay a small fee to be sent the most recent copy of your credit report.
What Information is on a Credit File?
There is a surprising amount of information to be found on your credit file. There are some personal details, such as your name, date of birth, your current and previous addresses, and whether you’re on the electoral roll. In terms of your financial history, your credit report includes:
- Bank accounts in your name
- Loans and other credit you have taken out previously
- Current outstanding debts
- Any missed payments or defaulted accounts
- County Court Judgements (CCJ) against you
- Bankruptcy or insolvency
- Regular Direct Debits, such as your phone and utility bills
Your credit file essentially shows financial companies whether you’ve had a good track record, and paid your debts back on time. Creditors can then determine how risky it is to lend you money.
How is Your Credit Score Calculated?
Did you know that you have more than one credit score? This is because, while your score is calculated from the same information found on your credit file, each creditor will have slightly different criteria when working out your credit score.
Generally, your credit score will range from around 300 to 850, and the higher your score the better. Complex algorithms are used to basically predict whether an individual is more or less likely to miss a payment. This is mainly based on your credit history – if someone has missed a lot of payments in the past, this implies that they aren’t very good at managing their money, and could miss payments in the future.
How Does Your Credit Score Work?
Once your credit score has been calculated, lenders will use this score when making a loan decision. They’ll take into account their own lending requirements, and cross reference the information on your credit report to assess your creditworthiness.
This means that your credit score can impact whether or not a loan provider will lend to you. But how else can your score affect you?
How Your Credit Score Impacts You
Not only can your credit score contribute to your chances of loan approval, it can also determine the types of loans you can apply for. While there are some specialist lenders that offer loans for people with bad credit, you may not be able to apply with more traditional lenders if you have a low credit score.
The thing your credit score and credit history can most impact is your chances of taking out a mortgage. Few mortgage providers will consider your application if you don’t have a good credit rating. Large personal loans can also be more tricky to obtain with a poor credit history.
Having a high credit score, as it usually means less risk for the lender, can additionally mean you’re offered more favourable interest rates. Loans for bad credit often come with comparatively high interest rates, and if a lender is offering a no credit check loan, the interest is bound to be higher and the lender may not be reputable.
Credit History Check
As mentioned above, your credit score may not be the only factor considered when you apply for credit – your overall credit history may also be taken into account. This will be things like how you have managed your previous loans, as well as your current debt, and whether there are any negative marks on your credit file.
Thankfully, not all lenders focus solely on your credit score and history – many short term lenders will also consider your employment history, as well as your monthly income and expenditure, for instance. So even if you have bad credit, you may still be eligible for a loan when you need to cover unexpected expenses. Taking out credit can even help you start to rebuild your credit score, if you make your repayments on time or early.
And if you’re looking for more ways to improve your credit score, you can check out our blog post on the five simplest ways to boost your credit rating here!