04 December 2020
Understanding Your Credit Score
Your credit score is a numerical representation of how lenders view your creditworthiness, which is determined based on your credit history and how you have managed debt in the past. It is used by lenders to assess the risk of lending to you and to determine the terms of a loan.
In the UK, there are three major credit reference agencies - TransUnion, Experian, and Equifax - that use different methods to calculate your credit score. As a result, your credit score may vary depending on which agency is used. At Boom Community Bank we use TransUnion.
Here is an overview of the credit score ranges used by each agency:
- Very Poor (Rating 1): 0-550
- Poor (Rating 2): 551-565
- Fair (Rating 3): 566-603
- Good (Rating 4): 604-627
- Excellent (Rating 5): 628-710
- Very Poor: 0-560
- Poor: 561-720
- Fair: 721-880
- Good: 881-960
- Excellent: 961-999
- Very Poor: 0-438
- Poor: 439-530
- Good: 531-670
- Very Good: 671-810
- Excellent: 811-1000
Why it’s important to maintain a good credit score
If you have a low credit score, you may find that you are unable to access a loan from a high street bank, and the cost of borrowing is high. You may still be able to get credit but you’ll have fewer lenders and offers to choose from.
If you have a high score, cheaper loans and lines of credit are likely to become available to you as lenders view people with good credit scores as less of a risk and as a result, they offer them better deals.
Your credit score can affect your ability to take out a mortgage, get the best rates on credit products like loans and credit cards, even whether you qualify for 0% balance transfers. It is always a good idea to check your eligibility before applying for credit to see your chances of being accepted.
Checking your credit score
You can sign up for a credit report website like Experian or ClearScore to check your report. It won't impact your credit rating and is usually free. It is important to know your credit score, as with this information, you can work towards maintaining or improving your credit score.
Improving your credit score
Credit reference agencies take several things into account when they calculate your credit score. When you know what they look for, you take steps to improve your credit rating.
Here are some things you can do that may help:
- Register on the electoral roll at your current address. Even if you’re in shared accommodation or living at home with your parents, your registration status can have a significant impact on your score.
- Begin to build your credit history. Borrowing small amounts and making regular payments on time can put positive credit history on the map, but try to avoid increasing balances. Long -unning, well-managed accounts will usually improve your score. Credit builder cards can be effective if you use them for a small amount of spending each month (on everyday essentials you were going to buy anyway). Then make sure you repay the card on time and in full each month to avoid paying interest.
- Keep your credit utilisation low. Your credit utilisation is the percentage you use of your credit limit. For example, if you have a limit of £2,000 and you’ve used £1,000 of that, your credit utilisation is 50%. Usually, a lower percentage will be seen positively by lenders and will increase your credit score as a result. Try and keep your credit utilisation below 30%. However, try to avoid building up too much credit that gets left unused as unused credit can have a negative impact on your score.
- Check for errors and mistakes in your report regularly. Even small mistakes, such as a mistyped address, can affect your score and could be enough for a lender to refuse credit. It’s worth checking your credit report to make sure all the information on it is accurate and up to date and if you spot a mistake, contact the provider directly and ask them to fix it.
Monitor your credit file for fraudulent activity. If fraudsters gain access to your personal details, they could take out credit in your name without you being aware. If you see something on your credit report that is wrong, such as an application you don’t recognise, you may have been victim to identity fraud.
- Avoid moving home too often. This isn’t always possible to avoid, but it’s worth bearing in mind that lenders like to see stability in your circumstances. Changing your address frequently may make lenders think you could be having trouble paying rent or are avoiding financial commitments for example.
- Keep old accounts open and show a long credit history. It can be good to show lenders that you can successfully manage multiple credit accounts, especially over a long period of time. Most credit scoring models tend to reward you for having long-standing, mature credit accounts and for only using a small portion of your credit limit.
This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.