What is a credit score?
What is a credit score?
Your credit score is essentially a number that shows lenders how ‘creditworthy’ you are. It indicates how reliable you are when it comes to your finances, which heavily influences how much lenders will be willing to lend to you.
Here we will take a look into what affects a credit score, how it is calculated and more.
What can your credit score affect?
Your credit score, or credit rating, can affect many things, but it predominantly will affect your ability to borrow money. If you have a low rating, you may find yourself being rejected from banks or other lenders or being limited to what you will be offered as many lenders will not want to lend to high-risk customers. This can include requests for mortgages and other loans, credit cards and even a current account.
What makes a credit score?
There are many things that are considered when creating your credit score. Every time you apply for a credit card or a loan, or you miss a payment, or any other digital financial action, your credit report will show it. This record is what dictates your score and affects whether you are deemed reliable by lenders or not. So, if you find yourself wondering, ‘Why is my credit score so low?’ take a look at what is used to make your score.
Your payment history
How you pay back what you owe is valued highly when it comes to your credit score. This will show lenders how reliable you are with paying back your loans and credit cards. If you have missed multiple payments, only pay back the minimum you owe each month, have had to set up repayment plans, or have been declared bankrupt, this will have a negative effect on your credit rating.
Your debt history
How you have handled debt can affect your ability to lend. For example, if you are in a lot of debt and have been unable to pay it back, this will lower your score. Even if you are no longer in debt, your debt history can linger on your credit records for around six years.
Your credit history length
Since lenders use your credit history to determine your ‘creditworthiness’, having plenty of history to show how well you pay back what you owe will be very beneficial when it comes to lending money. However, it can have the opposite affect if your history isn’t very clean, or if you have no history at all.
The types of credit you use
There are so many types of credit, for instance, credit cards, store cards, personal loans and paying for something in instalments, such as a car. Different types of credit hold different levels of risk. For example, a pay day loan will hold a higher risk. Therefore, the types of credit that is on your history will affect your score.
Recent applications for credit
When you apply for credit, a ‘hard search’ is carried out. This means each application will appear on your credit report whether you were accepted or not. They will remain on your report for 12 months. If you apply for multiple forms of credit in a short period of time, this could indicate that you are not currently financially stable, which can be a risk of concern for lenders.
How is my credit score calculated?
Credit scores are calculated with statistical data based on your financial patterns. Credit reference agencies use your history to calculate your score; the three main agencies in the UK are TransUnion, Equifax and Experian. Lenders will often use more than one of these agencies to decide whether you are reliable enough to lend to. But you can also use them to find out your credit score yourself.
What does it mean if my credit score is low?
If your credit score is low, then you are considered as high risk; there is something in your credit history that has deemed you unstable financially to lenders. There are many things that could have caused a bad credit score, including a bad payment history, being declared bankrupt, having a County Court Judgement (CCJ) or having no history at all.
This can either result in your credit application being rejected, being offered loans with a higher interest rate or only being offered a smaller loan than you requested. However, this is only a temporary situation and there are many things you can do to improve your credit score.
Do lenders only use credit scores for financial decisions?
Lenders will often consider other circumstances, as well as your credit score, when deciding whether to give you a loan or not. Each lender will have different guidelines set out depending on how much risk they are willing to take.
A few things they will consider are:
- How likely you are to repay money back based on your credit history.
- Whether you can afford the loan based on your financial circumstances.
- Your ability to keep paying back the loan.
You can improve your chances by building your credit rating and ensuring your details on your report are correct and up to date.