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Understanding your Credit Score

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One of the main things that being in debt will affect is your credit score. You can find out your current credit score for free online in just a few clicks, as well as your entire credit history, in many cases.

Our guide will explain just how your credit score works, what affects it and just how it impacts on your everyday finances.

What is a credit score?

Also known as your credit rating, a credit score is a record made up of entries by third parties that demonstrates to a future lender how good you are at paying back money you’ve borrowed. Usually, your credit score will be a three-digit number, and is representative of your credit record.

Your credit record includes:

  • How much debt you are in
  • Details of any debts that are unpaid
  • Details of any defaults
  • The amount of credit you have available to you

How strong your credit score is goes a long way to deciding what kind of steps you’ll be able to take in your financial life, from credit cards and loans, to mortgages and even mobile phone contracts.

A simple credit check gives the lender the info they need to decide which customers their money is safe with, and the types of people who present the least risk will qualify for the best products and deals.

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What impacts my credit score?

Credit cards/loans

Your credit score reflects all the times you’ve borrowed money in the past and how reliable you’ve been at paying it back. One of the biggest factors impacting your credit score is access to a high level of credit, for example having multiple credit cards or several loans at one time.

If you have a lot of debt and are juggling multiple credit cards and loans, you will likely have racked up a history of defaulting on payments. This will lower your credit score, whereas, if you have a history of sensible borrowing and always clearing your debts quickly, your score will be higher.

Other factors that will impact your credit rating

Your credit score can be affected by several factors, like how long you’ve been on the electoral roll at your current address, and how long you’ve held your bank accounts.

How you handle your household costs will also have an impact. For example, if you’re always late paying your council tax or gas bill, this will have a negative effect on your credit rating.

Other factors that may damage your credit score include:

  • Bankruptcy
  • Insolvency
  • Not being on the electoral register
  • Late or missed bill payments
  • Having no credit history, for example if you’ve just moved to the UK or have just moved out of your parents’ home
  • Regularly running credit checks or applying for credit
  • Being the victim of fraud (i.e. if you’ve been the victim of credit card fraud and someone has ran up a lot of unpaid credit that is attributable to you)

What doesn’t affect my credit score?

There are some factors that won’t have an impact on your credit score, for instance:

  • Student loan debt (unless you’ve defaulted)
  • Rent arrears (unless you’ve been referred to a debt collection agency)
  • The credit score of your address – it’s a myth that moving into a home where the previous occupants had a bad credit score can affect your own score
  • The credit score of your spouse or partner, unless you have shared bank accounts or loans

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How high should my credit score be?

Your credit score is a three-digit number, and credit scoring goes up to 999. In the simplest terms, you want your credit score to be as close to 999 as possible.

In reality, all you need is a credit rating that will help you achieve the financial goals you set in your life, whether that’s a mortgage application, credit cards, loans, or other financial products.

What is a good credit score?

Although it varies between credit agencies and depends on the credit scoring model, a good credit score is considered as somewhere between 670 and 799, while anything above 800 is considered an excellent credit score.

If you check your credit and you fall into the ‘good’ category, most lenders will be happy to talk to you, and you will find it far easier to do a range of things, from getting a better contract for your mobile phone, to being offered the most favourable interest rates by credit card companies.

What is a bad credit score?

A credit score that’s 669 or below is considered a poor credit score. Credit brokers and lenders sometimes refer to the people who fit into this category as ‘subprime’ consumers, because these borrowers may find it difficult to repay a loan and therefore represent a risk.

With a poor credit rating, lenders will be wary of you. It might be difficult for you to make the simplest credit applications, or even open up a bank account.

If your credit report is damaged because of debt, there are ways to rebuild it, and you should seek debt advice as soon as you can.

Where can I check my credit score?

There are three main credit reference agencies (or credit scoring agencies) in the UK – Equifax, Experian Credit, and TransUnion – all of which are regulated by the Financial Conduct Authority (FCA).

They offer you the most reliable way to check your credit and track any credit score changes.

Any serious credit reference agency will usually charge you for a credit check, often in the form of a paid subscription.

Normally you can take advantage of some kind of free trial, although free credit reports are only available for a limited amount of time.

Can check my credit score for free?

Outside the main credit reporting agencies, there are several websites where you can check your score for free.

These websites enjoy at certain level of access to customer credit files, and may give you some useful guidance on where you are in your credit journey.

It’s important to note, however, that unlike the three main reference agencies, many online credit check sites are not regulated by the Financial Conduct Authority.

That means the model may not always be as accurate, and the info they provide might not always be as reliable.

What should I look for on my credit report?

It’s important you stay in control of your credit report, and make sure the information is accurate and up to date. Here are a few things to look out for on your credit file.

Mistakes

Flag any debts or missed payments that aren’t yours. You can question these with the agency holding the information.

Missing or incorrect information

Double-check your address history and look for details of accounts that you’ve closed that still show as being open.

Debts that have already been settled

It can take time for credit reference agencies to update your details, so make sure they’ve updated your file with any cleared debts before applying for more credit.

Will a formal debt solution affect my credit score?

An IVA – or any formal debt solution – will appear on your credit file for six years, which is the full repayment period of an IVA, plus a year after it has closed.

It’s common for companies to register default notices on your credit report while you’re in a debt solution like an IVA because you’re making payments into your arrangement, but you’re no longer paying money directly towards your individual debts.

Once you have completed the arrangement, we suggest that you contact the credit reference agencies with proof your IVA is now complete. This will allow them to update your report and mark the IVA as satisfied.

How can people improve their credit scores after being in debt?

Being in debt will automatically impact your credit rating, which can put your financial life on hold. While it won’t be easy, there are ways you can gradually boost your credit rating after you’ve been in debt.

Register for the electoral roll

The simple act of proving where you live can improve your credit rating. All you have to do is register for the electoral roll in you local area, which will help lenders confirm your address in their accounts. That automatically makes you less of a risk in their eyes.

Maintain low credit utilisation

Credit utilisation is the percentage of your credit limit that you actually use. If you have a credit card that allows you to spend £500 per month, for example, but you only use £100, your credit utilisation is 20%. Keeping that percentage low reassures lenders your borrowing isn’t going to spiral out of control.

Pay for things on time and in full

It may sound obvious, but the best way for you to boost your credit report is by repaying your credit on time, every time, whether that’s a mobile phone, money owed to utility companies, or a credit card.

By building up a strong payment record over time, your credit score will gradually increase.

When will debts be removed from my credit history?

Your credit history is the official documentation of your financial life. Any debt that you carry will be listed there, as well as details of the creditors you owe money to, and any formal debt solution you have entered into in order to repay what you owe.

Your credit file will carry the details of your debt for six years from the day that debt was first incurred. After six years have passed, details of that debt will be wiped from your credit history, and you’ll be free to make a fresh start.

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Where can I get help and advice on improving my credit score?

If you’re struggling with debts or your credit score has been affected by your finances, contact Creditfix today.

Our friendly team of debt experts can offer free advice to help you find the best solution for your debt situation.

To get debt help today, call Creditfix for free on 0808 253 3482.