Your credit score. You know that it is important but how much do 9 am really understand about what a credit score in the UK really is, how it is calculated and how you can improve it?
What a Credit Score in the UK Really Is
Let’s say you are in a bit of financial trouble – it’s only temporary, but you could really use a little help right now. You’ve heard about payday loans from direct lenders. They sound good as these companies do consider ‘bad credit’. But you know they are still going to pull your credit score. What will they see?
Contrary to what you probably believe there is no such thing a universal credit score. Every lender, whether they are considering you for a mortgage, a car loan, a credit card or if they are payday loans direct lenders, has their own unique scoring system and lending criteria.
These scoring systems are never published and they are never shared with the applicants. So just because one lender has turned you down for credit does not mean that everyone else will automatically follow suit, especially when it comes to payday loans direct lenders – but it is likely.
When most people are talking about credit scores what they really mean are the credit scores that everyone who has ever applied for credit in the UK is given by the three major credit agencies.
They sell these scores to lenders but the number is only a part of a lender’s decision-making process when it comes to granting credit and some lend more weight to a person’s credit score from the credit agencies than others.
How a Credit Score is Calculated
Just how each of the credit reference agencies calculates their scores is also a bit of a secret. What is known though is about how much weight each of them gives to certain factors about your financial history when they are coming up with their numbers. Here is how it breaks down:
Payment History – 35%
Your payment history refers to things like have you made payments on credit lines you have been granted in the past on time and for how long you have been (or had) been making these payments.
The better your track record is the higher your credit score. The payments reported to the credit reference agencies have historically only been those made on credit lines, loans and credit cards. Recently though British Gas and British Telecom began reporting customer histories to the credit reference agencies as well.
Missed payments and late payments are all also documented and if there are too many of them, your credit score suffers some serious damage.
The Amount You Owe on Credit Accounts – 30%
Your total debt level also has a lot to do with your credit score. One thing you might not be aware of though is that the type of debt matters too. For example, if you have three credit cards with high balances that may be seen as irresponsible by the credit reference agency while a much larger debt – a mortgage that is paid on time every month – will be usually be looked upon far more favorably. Your debt to income level makes a difference as well.
The Length of Your Credit History – 15%
Usually the longer you have held credit accounts the better it is for your credit score, as long as you have a good payment history. It is for this reason that it is often a bad idea to close a credit account you have had for a long time. For example, even if you have a credit card you never use anymore but you have had it for years it’s better to shred it than close the account altogether.
New Credit Applications and New Credit Accounts – 10%
Every time that you apply for a new line of credit and a lender pulls your credit report it has a small (negative) effect on your credit score. If you apply for a lot of credit in a short period of time that impact will be more significant.
Types of Credit – 10%
The types of credit you have available to you are taken into consideration when your credit score is calculated as well. If though you are a person with a lot of credit accounts but you pay on them well you will still be scored higher than someone with fewer accounts who has a bad payment history.
Improving Your Credit Score
If you have a less than perfect credit score there are some things you can do to improve it. The first step though is understanding exactly what is actually on your credit reports. To do that you should order a copy of each of your reports – one each from Experian, Equifax and Callcredit. Doing so costs about ₤2 and your credit report is mailed to you about seven to ten days after you request it.
When the reports do arrive go through each of them carefully to make sure that all of the information it contains is accurate. If you do find a mistake you can write to the agency involved and ask that a notice of correction be added to your credit file.
The most obvious way after that to improve your credit score is to make a serious effort to pay your bills on time. If you are going to have a problem doing that occasionally then call the creditor involved before your payment becomes overdue – they may be willing to work with you and not report your late payment to the credit agencies.