Credit scores are a confusing and misunderstood part of personal finance, but understanding how they work can increase your chances of getting affordable credit.
You don’t actually have a single credit score. Instead, three different credit ratings agencies (Experian, Equifax and TransUnion) each hold a file called a ‘credit report’ about you. It’s made up of a combination of publicly available information and data from lenders and companies that offer credit. These include utility providers who send you a bill rather than charging up front.
Each agency also gives you a specific credit score that falls into designated categories, but the scales vary. For example, Experian’s maximum score is 999 and you’ll need 961 to get into the ‘Excellent’ category. Equifax’s maximum score is 700, with 466 needed for the ‘Excellent’ category. TransUnion goes up to 710, with 628 the threshold for ‘Excellent’.
Although the scales and calculations vary, over the long term you’ll commonly be in the same category for each agency. If you aren’t, it may be that one agency’s report doesn’t reflect a recent change as quickly as the others.
While the score is useful for tracking your progress over time, the specific number doesn’t actually matter that much. Potential lenders rarely, if ever, use the score as the sole or primary way of deciding if you get a loan. They’ll instead look at the individual items on your credit report.
So, what’s the use of a credit score to the consumer? Think of it simply as a ‘one glance’ way to summarize the overall effects of the information on your credit report. As a rule of thumb, the better your score, the more likely you are to get credit at all, to get credit at a lower interest rate, and to get a higher credit limit or larger loan amount.
Your credit report and score isn’t the only factor, however. Lenders are increasingly looking at affordability, which takes into account your income and any fixed outgoings. Think of the difference this way: your credit report shows whether a lender should trust you to pay the money back, while affordability shows whether you are able to pay the money back, regardless of your trustworthiness.
To add to the confusion, different lenders put more emphasis on different factors. For example, some put more emphasis on profitability. Some card issuers might be more interested in customers who always pay up in the end, but regularly rack up interest charges, rather than those who always pay their credit card bill in full each month (which is definitely a good idea if you can do it).
It’s definitely worth trying to boost your credit score, particularly before applying for a mortgage, but it’s more a case of good principles to follow rather than hard and fast rules. The simplest and quickest thing is to check for any mistakes or missing information on your credit report, particularly simple factors such as time at your current address and whether you are on the electoral roll. If you aren’t registered to vote, do so immediately.
Because it can take time to correct errors, it’s worth checking your credit report and scores regularly. You’re legally entitled to a free copy of some basic details (a ‘statutory credit report’) from each of the agencies, but this doesn’t actually contain your score. They’ll normally charge for full reports and scores.
Instead, rather confusingly, you can monitor your scores and report free of charge through certain third-party services that each cover a particular agency. These include Money Saving Expert’s Credit Club for Experian, ClearScore for Equifax and Credit Karma for TransUnion.
Other tips include:
- Always make at least the minimum payment on any card or loan as not doing so is a big black mark on your credit report.
- Be wary about making too many applications for credit in quick succession: only the fact that you’ve applied shows up (rather than the outcome) but it can appear to lenders that you are desperate for cash.
- If you’ve got any legal issues on your report such as bankruptcy or country court judgements, check with the credit agency to see when they’ll be removed and delay applications until after this (where possible).
