What is a Credit Score? How Are They Calculated?

Borrowing money or entering into a credit agreement is something we are all likely to do from time to time. Whether that be taking out a mortgage or signing up for a mobile phone contract, service providers need to assess whether we can afford the credit being offered and how likely we are to repay. But how are they able to make that judgment about our personal debt habits if they’ve had no dealings with us previously?

Businesses offering any kind of credit or financial service will typically check out our credit history which is held by a number of credit referencing agencies, Experian and Equifax being the most well known.

These agencies look at credit agreements we currently hold, or have held previously, and assess how well we’ve honoured those agreements; how much credit we have relative to our income; and a number of other factors. This information is distilled into a ‘credit score’ which for Experian ranges from 0 to 999 and for Equifax from 0 to 700. The higher the score, the more reliable you seem based on your credit history.


How To Get  A High Credit Score

In order to increase your credit score, you have to take out credit and repay reliably.

Getting a high credit score is a result of managing your money and managing your past credit well. Someone who has had multiple credit agreements, has never missed a payment and borrows well within their ability to pay is likely to have a higher credit score than someone who has never had credit at all.

Having no credit means that there’s no evidence to look at to judge whether you’re likely to repay or not. You’re an unknown and as such have the potential to be a risk to those who are considering lending to you.

Other less obvious factors which influence your credit score are whether or not you are registered on the electoral roll; whether you tend to change addresses frequently; and multiple credit checks over a short period.


How a Good Credit Score Benefits You

If, when assessed for a credit agreement, you’re found to have a high credit score, you’re likely to find it very easy to get credit, you’ll have lots of choice and be able to borrow at the best rates. Essentially, everyone is happy to deal with you because you’re viewed as being a ‘sure thing’ based on your past behaviour. Like any other business, lenders want to make money and if you’re viewed as a guaranteed profitable customer, then they’ll compete for your business and as such be prepared to make less from you in order to get it.

On the other hand, if your credit score is low, then you’re viewed as a risk. Someone who may not pay back what’s been lent and as such may cost more to deal with. The potential risk of doing business with you is reflected in the interest you’ll pay. Your choice of lenders may be limited and those who are prepared to offer you credit will likely charge more in interest to reflect to the perceived risk of lending to you.

It’s not only lenders who might check your credit score. Because a credit score provides, rightly or wrongly, an insight into how responsible you are with money, it can be used to imply how responsible you are elsewhere. With this being the case, employers have been known to perform credit checks as part the screening process for potential job candidates, even those applying for jobs outside of financial institutions.


Credit Score – What Doesn’t Affect It?

There’s a myth that says if someone who lives, or has ever lived, at your address has been in debt, then your property will be forever associated with bad debt and be ‘blacklisted’ by credit agencies. There is no truth at all to this, credit records are linked to the person not the place they live.

Similarly, couples and cohabitors don’t automatically affect one another’s credit scores, these remain individual and distinct unless there is a specific financial connection, such as a jointly held mortgage, where both credit records will be considered.

How Do I Find out my Credit Score?

Agencies holding credit information on you are obliged to provide they details they hold relating to  your credit score and credit history on request, although they may charge a small fee of £2 for providing it. If you’re rejected for credit, you can ask the lender which credit reference agency they’ve used to make that decision, so you know who to contact.

If there is a mistake on your credit file, you’re also able to insist that it is corrected, although you’re likely to have to be able to provide evidence of why it’s an error.


Can a Credit Score Be Repaired?

If you have a low credit score, due to financial mistakes, external issues, bankruptcy, or a history of bad credit, this isn’t necessarily permanent. It’s possible to rebuild a poor credit rating by becoming the sort of customer that lenders want to deal with. Your financial history over the last six years is typically what lenders will look at when assessing your creditworthiness, with more recent history being more important than older records.

It may take a while, and mean starting small,but repairing your credit score is possible. You may have to accept poorer deals, but dealing with them responsibly and keeping up to date with payments will help the rebuilding process.


Avoid Insolvency and a Low Credit Score by Seeking Help

Times are tough financially and the number of personal insolvencies are increasing. As with any financial problem, the sooner you seek help, the better the outcome.

If you’re struggling to meet your obligations and are on the verge of missing payments, get in touch for a free consultation. A Licensed Insolvency Practitioner isn’t just useful for businesses and individuals who are already insolvent, we can also help prevent an insolvency if consulted early enough. We can offer advice which may be enough to help prevent you becoming insolvent and damaging your credit score.

Don’t wait until you hit a bump in the financial road, let us help you avoid it.


Speak to Us, We can Help.