How Credit Scoring Works

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When it comes to managing your family’s finances, your credit score is an incredibly important consideration. Unfortunately, your credit score is also one of the most unknowable, confusing aspects of personal finance, and the subject is surrounded by several myths and misconceptions that can make managing your score effectively next-to-impossible.

As a result, we thought it might be useful to focus on the subject of credit scores, and answer the most commonly-asked questions people have about the topic.

What is a credit score?

A credit score is a three-digit number that is meant to reflect your financial status and allow lenders to assess your creditworthiness. The higher the number is, the more lenders will be willing to lend to you; the lower the number, the more difficult it may be to obtain credit or financial products.

What is the difference between a credit score and a credit report?

Your credit report is a record of various aspects of your financial health, such as loans, credit cards, existing debt, current accounts, store cards, and so on. Your report also documents your financial relationships and how accounts have been managed in the past, including details such as late payments, defaults, and county court judgements (CCJs).

A credit score is meant to be a way of summarising your credit report in three digits – an at-a-glance number that is designed to be indicative of your overall finances.

Who decides my credit score?

There are three credit reference agencies in the UK: Experian, Equifax, and TransUnion. All three of these companies compile your financial history and issue a credit score accordingly, though interestingly, your score may differ between each of these companies. Each of the three credit reference agencies have their own methodology for deciding your credit score, so you may find that your score is higher with one and lower with another. The difference shouldn’t be too extreme, but it’s something to be aware of.

How can I check my credit score?

  • You can check your Experian credit score directly with Experian.
  • You can check your Equifax credit score with ClearScore.
  • You can check your TransUnion credit score with Credit Karma.

However, be careful when signing up to view your credit score online. All of the above companies offer “premium” packages that offer a variety of extra benefits, but which are not necessary if you simply want to check your report and view your credit score. Checking your report should always be completely free, so if you’re asked to enter debit card details, double check to make sure you are not signing up for premium services you do not need.

What constitutes a good credit score?

Due to the difference between how each credit reference agency decides your score, there’s no definitively “good” or “bad” score that applies across all companies. For example, Equifax say that anything about 660 would be considered “good”, while Experian consider a score of 700 or above to meet the “good” criteria.

It is therefore usually best to try to align with what constitutes “good” for each individual agency.

What are the impacts of a poor credit score?

The biggest impact of a bad credit score is the fact that it becomes difficult to access financial products, such as loans, credit cards, mobile phone agreements, and even utility accounts in some cases.

However, while it may become more difficult to access the above products, it is not outright impossible. There are numerous provides such as Evolution Money who can offer personal loans to homeowners that are less reliant on a credit score, and plenty of credit card providers are willing to accept those with lower credit scores. So a bad credit score is not necessarily a complete bar on obtaining lending or financial accounts; it just means you may need to expand your search to find a provider who is more suitable for your particular circumstances.

How can I improve my credit score?

To meet the threshold for a “good” credit score, you will usually need to:

  • Be on the electoral roll, preferably for more than three years at the same address
  • Have relatively low credit utilisation (i.e. you are only using a small amount of credit that is available to you)
  • Have no defaults or CCJs
  • Have a history of making payments on time

Unfortunately, if you do have a default or CCJ, then this will remain on your credit report – and will thus influence your credit score – for up to six years, and there is nothing you can do to remove these from your file. Instead, you will need to focus on repaying debt (to keep your credit utilisation low), ensuring you are on the electoral roll, and always making payments to utility companies and mobile phone providers on time.

What should I do if I find an inaccuracy on my credit file?

Credit file inaccuracies are not uncommon, and if you request a copy of your file and notice an error, then you can ask the credit reference agency to address this. You will need to write to the agency in question and explain why the information they hold on you is incorrect, along with any supporting documentation you may have. All three credit reference agencies allow you to file a dispute online, or you can post your letter via guaranteed mail.

You will also need to dispute the information with the company who have provided incorrect information to the credit reference agency – for example, if a credit card provider has claimed that you missed a payment when you did not, you would need to write to the credit card company and the credit reference agency. Following an investigation, the incorrect information will either be removed by the company or a note will be added to your credit report to reflect the fact that the information is incorrect.

In conclusion

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Hopefully, the above has answered all the questions you have about your credit score, which in turn should allow you to better manage your financial health in the future!

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