You might think that your credit score and your credit rating are different, but they’re one and the same thing. Essentially, your credit score is a numerical value, usually between 0 and 1,000 (the UK’s credit reference agencies’ scales vary slightly) and this number tells lenders how risky it is to extend credit to you.
Your score also helps to determine what sort of credit you can get and how much, as well as how much interest you’ll pay on it. Credit scores are also important when it comes to some sorts of jobs, especially within the finance industry. If you want to know more about your credit score, especially about things that affect and don’t affect it, take a look here.
How Is a Credit Score Formed?
Your credit score is formed by the information collated by all the UK’s credit reference agencies and this info is kept on your record. All your loans, mortgages, credit cards, credit applications and employment history go on this record, as well the way you handle them. If you pay all of your debts on time, if you had a bad patch but fought back or if you’re always late with payments, it’ll all go on this file. If you’re mainly good, you score will go up; if you’re unreliable, it’ll go down.
Why Do You Need a Score?
UK lenders use your credit score to decide whether they’ll lend you money or not. Banks use it to decide if they’ll let someone open an account with them, too. This score is essential if you want to apply for any sort of credit as lenders prefer low-risk borrowers.
Obtaining Your UK Credit Score
The UK’s three main credit reference agencies – Equifax, Experian and Callcredit – offer you a free report if you sign up to them. You usually get one free report a year thereafter, but if you like to monitor your credit file then you’ll have to pay a monthly fee. When it comes to the scales, Equifax uses 0-600 and Experian uses 0-1,000, but the principle is the same and there’s the same bands – very poor, poor, fair, good and very good.
A Good Rating
A good or very good rating is in the upper quarter of these scales. With Experian, a good rating ranges from 881 to 960, for example. Higher ratings mean you’re a low-risk borrower, so you should be able to get credit easily. Having a poor rating doesn’t mean you can’t get credit, it may mean that you pay a higher interest rate than someone with better credit.
How Do the Agencies Calculate the Score?
The CRAs get information from banks, mortgage providers and other lenders each month. This information tells them who owes money, who’s a reliable payer and who’s missed a payment. These are just a few of the factors involved, though; the rest of the information includes:
- the number of bank accounts and credit agreements someone has;
- the individual’s credit limit;
- the length and “quality” of the credit history;
- the payment history, and
- the credit limit the person has.
Most of the attention – around a third – is focused on the payment history, with 30% going to the amounts owed. Another 15% of the “weight” is on the type of credit. The remaining attention goes to your latest credit agreements and to how long you’ve been a borrower for.
Most UK credit scores are good to fair, with only a few people being at the extreme ends. You can repair a poor credit rating but you do need advice.