Most of us have one but not everyone really understands how it works. Getting to grips with your credit score can be worthwhile.
If you’ve ever applied for a loan, mortgage, taken out a mobile phone contract or rented a property, the chances are you’ve had to go through a credit check. These are our digital finger prints which give any lenders a basic guide as to how likely we are to pay back the loan. They can be affected by many things including missed payments, defaults and taking out loans. Even the act of applying for a loan could damage your credit rating.
They are, then, incredibly important, so it pays to understand how they work. The basics sound simple – a high credit rating equals good right, but it’s a little more complicated than that. All sorts of things can affect your credit rating. Understanding these truths will help you get your finances sorted and back on track.
- Rich people can have bad credit
While being rich will make it easier to maintain a good credit rating it’s not the be all and end all. Credit ratings don’t measure how much money you have in the bank. They simply measure how likely you are to pay a loan back. They do this by gathering information from bank accounts, mortgages, loans, the electoral role, mobile phone contracts to give you a score.
Each time you miss a payment or are late, it can have an impact on your credit score. The bigger the problem, the bigger the impact. For example a County Court Judgement will make a bigger dent on your score than being late with the rent.
- There is no single credit score
Another misconception is that we all have a single credit score. In fact we have several. In total there are three credit rating agencies: Experian, Equifax and TransUnion collecting information about us and giving us a rating. In general they will assign a three digit score to denote your credit performance, but they differ in terms of methodology. A score of 700 may mean something very different depending on which agency you get it from. It’s also not impossible for you to have a good credit rating with one agency and a poor one with another.
- Having no credit score can be as problematic as a bad one
Ever been denied credit, despite never having taken out a loan or missed any payments. Well, that might be your problem because having no credit history can make lenders jittery. It means you’re an unknown quantity. There is no way of knowing how you’ll handle debt until you’ve built up a track record.
For this reason, some lenders want to see evidence of a credit history before they will lend to you. It can be worth taking out a credit card and making sure you pay off the balance regularly to give yourself a history of repayments.
- Credit ratings are not just about mortgages
Some people assume they’ll only need to use their credit rating when it comes to taking out a mortgage. In truth they are used for all sorts of things, from renting a property to taking out a mobile phone contract. They will also determine what kind of a deal you get.
For example, if you have a high credit rating you’ll get a much more favourable deal on any financial service. If you’re taking out a loan you’ll get a much kinder interest rate. If you take out a mortgage you’ll get a more affordable deal and need less of a deposit. Some buy now pay later deals also come with a minimum credit rating before you can apply.
In essence the better equipped you are to pay back a loan, the easier they will make it for you to do so. Lenders will still be willing to work with people with poor credit histories, but they will protect themselves by charging higher interest rates. It can be a bit of a self-perpetuating circle – requiring people who have struggled in the past to pay more for credit inevitably makes it much more likely that they will struggle in the future.
- You can fix your credit rating
If you’ve had credit problems in the past, don’t despair. You can turn things around. Credit scores are an ongoing process. Problems do not stay on your record forever and if you can demonstrate a good track record of repayment things can start to improve pretty quickly.
For example, let’s say you had some tough financial times a few years ago. This will have been noted on your credit file accordingly. However, if things change and you get better at paying on time, your record will reflect this. It will show people that you have turned things around and now represent a pretty safe bet.
- Not all credit checks affect your score
If you apply for a loan or credit card, they will perform a quick credit check to see if you’re eligible. Many people are put off by this idea due to the fear that this check can, in itself, harm your credit score. For example, if people see a check for a payday loan, it will be a red flag that you’re in financial trouble and might be a credit risk.
However, not every credit check will harm your score. Lenders increasingly offer ‘soft credit checks’. These are quick checks which give you an idea of whether you’ll be accepted but without leaving a great big footprint on your credit score.
- Joint accounts will affect your credit score
If you’re in a long term relationship it can seem sensible to get a joint account. However, before you do think about your partner’s credit score. Joint accounts will link credit score. If yours is good and your partners is bad, he will drag down your score. Be open and talk about money before you commit. It can be an uncomfortable conversation but it will help you decide how best to manage your finances.
