You’ve probably heard about credit histories, credit scores, credit ratings and credit checks on the TV and online, but do you feel confident about what they are, and why they’re important? At 19, I realised I didn’t know much about them at all.
Once I’d got my head around it (and I promise, it actually wasn’t hard), I started talking to my friends about their understanding of their credit history and credit scores. A lot of people my age seemed to feel very confused about what they are and why they matter. With the overwhelming amount of information online, what I wanted was one easy guide for people my age.
So here is my very own credit score breakdown.
What is a credit score?
Your credit score is a rating based on information in your credit file that suggests how much of a financial risk you might be. There are three major credit reference agencies which give you access to your score; Equifax, Experian, and TransUnion (formerly known as CallCredit). They all use different rating systems, but the premise is still the same.
Your credit file contains:
- Your name and date of birth
- How much money you currently owe (on credit card, loans and mortgages, for example)
- Financial links to others, such as joint accounts
- Bankruptcies, county court judgements (CCJs), missed payments or defaults
- Any financial products you have recently applied for.
This means late or missed payments on items such as regular bills (not just household bills, but phone contracts or even gym memberships) can have a negative impact on your credit score. Racking up big credit card bills that you don’t pay back promptly can also be damaging to your rating. Your credit history covers the past six years.
There are different ways you can access your credit score and many are free, so use these before paying for any services. Remember that each agency rates slightly differently so you’ll need to know what scale they use. Generally, the higher the score the better.
Here’s how to access your credit file:
|Provider||How to see your credit score||Rating|
|Experian||You can access this through the Experian website for free. It offers a free subscription service that gives you monthly updates on your credit score, or a paid for service costing £14.99 a month for a more detailed report.||Scored out of 999|
|Equifax||You can request a free one-off report on the Equifax website or access a free overview on ClearScore (ClearScore is not a credit reference agency itself; it gives you access to the data that Equifax holds on you). Equifax also offers a subscription service with a free 30-day trial, but after that you pay £7.95 per month.||Scored out of 700|
|TransUnion (formerly CallCredit)||You can either apply for a free one-off paper report on its website or you can access it for free through Noddle.co.uk (which is part of the TransUnion group). The service does offer paid-for add-ons but the key information is free.||Scored out of five|
Source: Moneywise, 25 July 2018
Why does it matter?
Lenders and credit providers use your credit history to work out whether you qualify for credit cards, loans, mortgages and other services. In theory, the better your credit score, the better chance you have of being accepted when you apply for credit, and so the better options that will be available to you.
However, lenders don’t use credit scores from credit reference agencies to determine your eligibility for loans – they use their own scoring metrics. Credit scores from credit reference agencies are simply an indicator of what you’re likely to get.
Mortgages, loans, credit cards – these all sound like distant mythical entities when you’re young and living at home. The bad news is you’re going to need to start making moves to improve your chance when dealing with these products in the future. The good news is it isn’t hard, it won’t take much effort and you’ll thank me later.
As Lisa Hardstaff, credit information expert at Equifax, explains: “Past financial activity could provide a ‘red flag’ to a mortgage lender, for example, on how reliable a person might be with repaying their mortgage.
“Exceeding an overdraft limit or struggling to clear debts could indicate to a lender that a person can’t take on anymore debt. Your credit history might also affect special introductory rates or other attractive mortgage offers that could only be available to people whose credit history meets certain criteria. Because of this, it’s important that anyone planning on buying a home gets their finances ready before applying for a mortgage.”
How can I work on my credit score?
When I checked my credit score for the first time I was met with a pretty average rating. This is no surprise because, being only 19, credit reference agencies don’t have a lot to go on. It’s a misconception that you’ll have a good score if you’ve never taken out credit; you’ll actually benefit more from building up a credit history.
James Jones, head of consumer affairs at Experian, comments: “It’s never too early to start building your credit history.
“Many young people will already have some form of credit, such as a credit card or mobile phone contract. But they should always make sure they’re not borrowing more than they can afford – missing payments will lead to their score being negatively impacted.”
Here’s how I set about improving my score:
- Register to vote – being on the electoral roll helps lenders verify your identity to prevent fraud and will boost your credit score.
- Manage bills well – managing and paying items such as household bills and phone contracts on time will positively impact your credit history and overall rating. Keep this in mind if you go into shared or student accommodation and you put all of your names on the bills - if other people don’t pay it will be on your head.
- Don’t repeatedly apply for credit – it might seem a good idea to apply for as many credit cards as possible to maximise your chances of being accepted. Actually, this suggests to lenders that you are struggling financially and it can bring your score down. Use free online pre-eligibility checking tools to make sure you have a high chance of being accepted before applying. Experian recommends you aim for just one credit application in a three-month period.
- Close unused credit accounts – if you have credit card accounts that you aren’t using they can bring your score down, even with no outstanding balance. Close these to prevent any negative impact.
- Manage a credit card well – having said that, regular and responsible use of a credit card can help your credit score as it provides agencies with your credit habits so that they can predict
And don’t panic about your student loan as it isn’t included in your credit report. However, if you apply for credit lenders will assess how capable you are of meeting repayments and this could be affected by any regular student loan repayments you are making later in life.