Everyone has a credit score based on how well they handle their finances. If you apply for any types of credit, companies will see your credit score and determine how much risk you represent.
In simple terms, a high credit score means lenders will view you as low risk. That means if you want to make a loan application, get a mortgage or apply for a credit card, you're likely to be accepted.
Since, from time to time, most of us need to get credit for one reason or another, it's essential to try to ensure you have a good credit score. This will make it more likely that your application will be accepted. It will also mean that you're usually offered a better interest rate or a higher credit limit.
So, what is a good credit score considered to be? How do credit scoring models work? Which factors affect your credit score? And how can improving your credit score help you to better manage your personal finance?
Read on to discover our advice about credit scores and what they mean for you.
For anyone who wants to be sure of being accepted when they apply for various financial products like loans, credit cards, or even a mortgage, there isn't a single number that can be deemed a good credit score. This is because different lenders use different criteria as they are looking for something different in their potential customers. As a result, one lender may think you're a good prospect for their financial product, while another may refuse to consider you for their loans because you don't meet all their criteria.
It also becomes more confusing when you consider that there are different credit reference agencies too. Lenders can use several credit bureaus when carrying out checks on your credit accounts. Each one of those credit reference agencies rates your credit score differently using different scoring models. Therefore, your credit reports may be different depending on which agency the lender has used.
The three credit reference agencies that are most used by lenders are Equifax, Experian and TransUnion. The credit scores are slightly different with each one. For example, Experian has scores that range between 0 and 999. Meanwhile, with Equifax, the scores usually range between 300 and 700, and with TransUnion, scores run between 0 and 710.
Not only are the actual figures for the credit scores different with each agency, the number that equates to a good credit score is also different for each one.
With Experian, a score is considered to be good if it is 881 or higher. With Equifax, a score is rated good if it's over 420. In the case of TransUnion, it's said to be a good score if it's 604 or above.
With this in mind, it could depend on which agency lenders are using and whether or not your score will meet their criteria.
Before you apply for any new credit, you might want to know if you can improve your credit score. This is because every time a new lender checks your credit reports, the data will be kept on your credit file. If you make a lot of credit applications in a short space of time, it will be noted in your credit history. If you do this regularly, anyone who checks your credit report will be able to see it and could note it as a red flag that you are a potential risk, especially if you were denied credit any or all of the times that you applied.
So, what will you see if you look at your credit file?
There are several types of data that you'll be able to view. For example, if you check your Equifax credit report, you'll see the following information:
Personal details - your address, name and date of birth.
Your credit account details - information that Equifax receives from your creditors, including the kinds of accounts (such as mortgage, credit cards, a car loan, or student loans) as well as the date the accounts were opened. Furthermore, it'll show your loan amount or available credit limit together with your credit card balances and full payments history. Not every credit account will be on your account. For example, any credit card that has been closed will have been removed from the report after a specific time period. Also, some accounts may not have been reported by your creditor to Equifax.
Any bankruptcies - if you have ever declared bankruptcy, your Equifax credit report will contain details of it, including its chapter and filing date.
Collections accounts - these will include any overdue accounts which have been handed over to collection agents. These could include credit accounts together with overdue payments owed to cable companies, retail stores, banks, mobile phone companies, or car insurance firms.
As you can see, your credit report will show your entire credit history, including your current credit card balance, payment history, and any late or missed payments you may have had over recent years. Any incidents where you've failed to make payment on time, defaulted on a loan or declared bankruptcy will be listed and will add up to a bad credit score.
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There are two kinds of credit inquiry that can be made on your file - hard and soft.
A soft inquiry can occur if you check your own credit report, if a current creditor conducts a periodic review, or if a company extends you a pre-approved credit offer. These inquiries won't negatively affect your score. In fact, if you check your report regularly, you can better monitor it and ensure that any incomplete or inaccurate information or any suspicious activity which may indicate identity theft can be spotted quickly.
A hard inquiry will occur if an individual or company reviews your report after you make an application for a service or credit. A hard inquiry will stay on your credit report for as long as 2 years. It may have a negative impact on your credit score, but the impact often lessens over time.
A range of details about your payment history and debt will be compiled and used to work out your score. They include:
Your payments history - any payment made more than 30 days late is likely to be reported. Any bankruptcies or CCJs will have a negative impact on credit scoring, and these marks will remain on file for up to 7 years.
The amount you borrow - your credit utilization ratio is the most important factor - i.e. how much credit you use rather than the amount you're borrowing. A lower utilisation ratio is better since it will show you aren't financially stretched. You can lower your ratio by increasing your card limit or paying down your credit card balances.
Credit history length - credit scores can get a boost if you can show how well you manage your finances over an extended period.
New credit lines - every time you apply for credit, it will be recorded on file.
Credit type - if you have several different kinds of credit, it may improve your credit rating since it shows you can use credit responsibly.
A good credit score will enable you to borrow money if and when you need to. You may also be offered a higher credit limit and lower interest rates so it won't cost as much to pay back.
There's no quick-fix solution to boosting your rating, but it can be nurtured over time if you follow this advice:
Make sure you're on the electoral roll. You can register for free.
Pay your bills on time. On time payments will keep your rating looking healthy.
Remain within your credit limits.
Check your own credit report regularly and amend any mistakes. You can do this for free.
Close any old cards.
Cut any financial link with a previous partner.
Consider taking out a credit building card and pay it off regularly to boost your rating.
The bottom line is, if you want to enjoy maximum borrowing potential and the most preferential rates, you need to keep your credit rating looking healthy, so make sure to check yours for free regularly and take action if you spot anything untoward. Also, take care to manage your finances well, making all payments in a timely manner so that your rating won't take a damaging hit.