Introduction: What is credit rating/credit score?
Your credit rating is essentially the same as your credit score. It’s a numerical value usually between 1 to 1000 that essentially tells lenders how risky it is to lend you. Your credit score decides a lot of things. For instance, it decides which financial products you will have access to. Your credit score also determines how much interest you pay for the personal loans, short term loans or any other kinds of loans you decide to take. Your credit score can also affect your ability to get some jobs in the UK, especially those in the financial services industry.
Your credit score/rating is recorded by credit reference agencies. The score is recorded alongside your credit record or credit history which simply shows all your financial details i.e. the loans you have taken out, loan defaults (if there are any), credit inquiries, employment history, among other information for the past six years. You get a better credit score/rating if you pay your debts on time and adhere to all your other credit agreements.
Why is your credit score useful?
All UK lenders (with the exception of most payday loan lenders) use credit scores to decide who to lend money. Most UK banks also use credit scores to decide if they will open bank accounts for new applicants. Credit scores are useful to anyone who intends on accessing any form of credit in the UK from personal loans to home loans. Your credit score is useful since banks only like lending to people who are likely to pay back and also because they aren’t obligated to lend to anyone they deem risky.
Finding out your credit score in the UK
There are three main UK credit reference bureaus/agencies where you can get your credit score. They include; Experian, Equifax, and Callcredit. All these three agencies offer free credit reports when you sign up. You should also get a free report every year. However, you’ll need to pay a fee to get your credit report more often as well as enjoy other services such as; credit score monitoring, fraud protection, etc. It’s important to note that different credit rating companies record different information about you, different lenders, etc. so the score can vary. Credit reference agencies, however, provide guidelines on how they have rated you. The main agencies focus on the most important things lenders look out for which is why you should stick to reputable agencies only.
What’s a good credit score/rating in the UK?
A good credit score or credit rating can vary from one lender to another. This is usually the case in the UK and other places in the world. However, a higher score is preferable everywhere. Credit scores vary since different lenders use different credit reference agencies. Also, lenders assign borrowers their own score which is based on what is on your credit history. In a nutshell, a good credit score can vary from one lender to the other although a high rating is preferable to all since it indicates that a borrower is low risk.
A high credit score indicates that you have a higher probability of paying back any loans you take without giving your lender problems. Individuals with high scores, therefore, have better access to credit i.e. they can borrow more at a lower rate.
It’s important to note that credit reference agencies don’t know exactly how all lenders score their borrowers. They, however, give guidelines on what lenders look for in general as part of their credit report service.
How is your credit score calculated?
Credit rating agencies don’t seek out information from borrowers. Instead, information is given to them by banks, retailers, credit card companies etc. These institutions report to credit rating agencies information like; who owes them money, how much they owe, how payments are made etc. Late payments, defaults, over-borrowing or exhausting spending limits obviously work against a borrower. There are however key factors used in calculating credit scores. These factors have the biggest impact on your final score. They include;
1. The number of bank/credit accounts you have
2. The type of accounts
3. Available credit
4. Length of credit history
5. Your payment history.
Your payment history and amount owed weighs the most on your credit score i.e. approximately 35 and 30% respectively followed by the type of credit at approximately 15%. Your new credit and length of credit history weigh the least at approximately 11 and 6% respectively.
Credit scores per credit rating agency
Equifax scores people 0 to 600. Any score between 0 and 278 is very poor score, 279 to 366 is poor, 367 to 419 is fair, 420 to 466 is good and, anything above 466 is great/excellent.
Experian scores people 0 to 1000. Any score between 0 and 560 is very poor, 561 to 720 is poor, 721 to 880 is fair, 881 to 960 is good and, anything about 960 is excellent.
The above information highlights the most important information about credit scores and ratings in the UK. In general, most ratings fall between 300 and 850 and the higher the score, the better it is for you when taking out loans. It’s also worth noting that credit scores differ from one lender to another because the formulas used to calculate the scores aren’t exactly the same. Credit rating agencies, however, use the same methods.