In the UK there are three major credit reference agencies which manage our credit report and credit score. But what exactly is a credit score? Is it the same as a credit report? What qualifies as a good or bad credit score? How do lenders use credit scores when making decisions? And what role does a credit score or credit report have in the pre-employment identity verification checks which some employers use?
What is My Credit Score
To understand credit scores, we have to start with the credit report. Your credit report is just a financial record of your past and present activities. Credit card providers, banks, utility companies or mobile phone providers give information about you to credit reference agencies on a monthly basis. This information includes things like whether you have applied to take out any new loans, how regularly you are paying off the debt you already have, whether they are taking you to court over unpaid debts and so on. This is your credit record. The agencies will then take the information on your report and generate a score. Each agency does this slightly differently, so it’s less important to pay attention to the exact number. Instead, look at the grading you are given, which ranges from “very poor” to “excellent”.
Lenders consider both your credit score and the details on a credit report when deciding whether to give you credit.
Other Factors Affecting Credit Score
- Affordability – many people believe that the higher your salary, the higher your credit score. That’s not strictly speaking the case. Lenders are more interested in how much money you have left over after all your essentials have been paid for. If money is tight – whatever your salary – lenders are going to worry that you will not be able to afford payments.
- Credit cards – lenders are interested in what percentage of your available credit you are using. If you have one card and spend up to the limit each month, this is viewed negatively even if you pay it off. Having a few cards with available credit which you are not using ensures you are seen as a better risk.
- Bill payments – your gas and electricity suppliers or mobile phone company will all share information with the credit reference agencies about whether you are paying on time. Late payments will go against you.
- Loyalty – credit agencies give higher scores to people who have been with the same bank or building society for years. If you change your current account, then your credit score might dip until a few months’ payments have been made from the new account.
- Frequent application – applying for multiple loans or credit cards in a short period will negatively affect a credit score as lenders may perceive you as desperate.
- Association – if you have a joint bank account or mortgage with someone else, any debt which they are in can affect your credit score too.
- Online gambling – credit reports might have information about where you spend your money as well as how much you spend. Payments to multiple online gambling sites are a huge red flag for lenders.