Understanding Your Credit Score and What It Means for You

If you’re concerned about your financial future, there’s one metric that’s worth paying attention to above all others. This is your credit score. But exactly what does this number signify, and how is it calculated? Let’s delve into the details to understanding your credit score.

What Is a Credit Score — and Why Does It Matter?

The first thing to understand is that, in the UK, there’s no one single credit score. Rather, an individual might be assigned different scores by different organisations, known as Credit Rating Agencies.

These agencies include big names, like Experian, Equifax, and TransUnion. There’s no standard for what constitutes a ‘good’ score. Experian uses a scale that extends all the way up into the nine hundreds, while Equifax and TransUnion cap out much lower than that.

To make things more complex, lenders may also use their own internal scoring systems to assess the risk posed by a potential debtor.

Credit scores exist in order to do exactly this. If you have a low score, you’ll be perceived as high risk by lenders. This risk will be reflected in the amount you’re allowed to borrow, the interest you’ll be charged, and the terms and conditions attached to the loan.

How to Check and Monitor Your Credit Profile

The good news is that you can obtain the same information as your lender, and thus you’ll be able to see where improvements can easily be made. Get hold of your credit reports, and see if there are any errors and inaccuracies. It might be that you’ll get an instant boost just by correcting the record. This will help you in understanding your credit score.

Other measures, like getting yourself registered to vote, and ensuring that your address is accurately recorded on the electoral roll, can make a big difference.

What Affects Your Credit Score and How to Improve It

As well as ensuring accuracy, you’ll want to make sure that you are a responsible debtor. This means getting your bills paid on time, and ensuring that you don’t default on your loans. You’ll also want to keep your credit utilisation low. This basically means you’ll only borrow around a quarter of what you potentially can borrow.

Often, it’s possible to build your rating through the use of small loans and credit cards. In the latter case, it’s important that you pay the outstanding balance in full at the end of each month. If you have a poor credit history, specialist options like bad credit car finance may still allow you to buy a necessary vehicle. If you stay on time with regular payments, this can also help boost your credit score.

Using Your Credit Score Smartly and Building Future Plans

If you’re able to drive up your score, you’ll ultimately drive down the cost of borrowing. This might be made easier by the Bank of England’s recent drive to relax the rules on Loan-to-Income ratios, which might make it easier for poorer households to get onto the property ladder, and ultimately enjoy a better financial future.