A credit score is a numerical rating system used by banks, credit card companies, insurance companies, etc. to evaluate your creditworthiness. They use your score to determine how much you can qualify for, for loans, mortgages, credit cards even the interest rates on these products. Credit scores and credit scoring systems vary between countries, so make sure you always check with your regulatory agencies. In Canada your credit score is rated between 300-900 points, whereas in the UK your credit rating is scored differently by different companies (FICO scoring is between 300-850 and TransUnion score is between 100-900).
What does it mean to have a good credit score? The higher the number on your credit report the better your credit score. As an example a good credit score is somewhere in the range of 650 and higher. A score lower than 650 can indicate anything from bankruptcy (which can stay on your credit history for 7 years), to collections still outstanding. A low rating can also just indicate that you don’t have a credit history and are just starting-out.
Credit scores are calculated based on varying metrics. Some elements that are considered are: how long you’ve had a credit history, balances carried on credit cards, missed payments, outstanding debt, number of times you try and obtain new credit, types of credit, cancellation of credit, collection agency debts and bankruptcies.
Increasing your credit score is very much dependent on your own financial situation. A good thing to keep in mind when trying to increase your credit score is trying to keep only 35% of your entire debt “active”. A simplistic explanation of this is if you had a £100 credit card your balance should always try to stay at £35 or lower. Some other ways to increase your credit score is to always pay bills on-time, always make at-least the minimum payment, contact lenders if you think you may default on a payment and don’t skip payments if they are being disputed.
There are two types of credit checks, soft-checks and hard-checks. Soft-checking is a credit check that you yourself have made to check your credit score (usually in writing), a hard-check is when a company makes an enquiry on your credit score such as a financial institution or car dealership to approve you for credit and interest rates. Many people do not know that getting credit checks can actually affect their credit scores. Soft-enquiries have no effect on your credit but hard-enquiries by companies do. When you apply for credit in the UK you need to sign an agreement that states that you are aware that a company is about to perform a credit check on you and that you understand the ramifications of this. Make sure you are smart about how many times you apply for credit to avoid being seen as “urgently trying to get credit” or “living beyond your means”. If you are planning on applying for credit such as buying a car make sure you do your credit checks and comparisons in a two week period so that it only shows up as one credit check. Make sure you only apply for credit when you need it and try not to apply on a whim such as with in-store credit cards.
The country you live in may also be a restriction as to how many times you can check your credit score. In the US you can only request your credit score once per annum for free whereas in UK you can request your credit score multiple times during the year for free.
If you are in the UK you have 3 options to check your credit, you can request a copy by mailing or faxing a request letter, order by phone or order it online. Equifax, CallCredit and Experian are just three of the credit bureaus available to check your credit score. For more information on credit scores you can visit FCA (Financial Conduct Authority).
Checking your credit score regularly is a good way of stopping credit fraud early. In the UK you can order a credit report for free from Equifax. As a general rule checking your credit score at least once a year is important but checking it every 6 months is extra insurance against credit fraudsters. Making sure that your personal and confidential information is kept up to date and in good order is the best way to counteract fraud.