If you intend to apply for credit you need to ensure that your credit score is in ship-shape as that is what banks and lenders look at first before deciding to give credit. For an individual to be eligible for the best offers have a robust credit score is paramount. In this blog we look at what constitutes a good or bad credit score.
Understanding a credit score
When you apply for a loan, mortgage or credit card, the bank or lender checks the credit score to decide if the applicant is eligible. The credit score is calculated as per an individual’s credit history and the way they have handled their finances over time. Using the credit score the bank or the lender can evaluate the credit risk.
Calculation of credit score
A credit reference agency has the task of calculating credit scores. In the UK there are three agencies TransUnion, Experian and Equifax. Lenders send the financial information of creditors to every CRA. Additional information including court judgments and records are shared as well with the CRA’s and collectively they constitute a credit report.
Good vs Bad credit score
No credit score can guarantee credit from a lender as there are different criteria taken into account by banks and lenders when issuing credit. While some may not agree to issue credit, others might consider it. While having a good credit score is essential to prove creditworthiness there are additional factors evaluated before a lender decides to issue credit.
Factors that impact the credit score
Some of the factors that impact a credit score negatively include:
- Frequent credit applications.
- Bankruptcy, court judgments and defaults etc.
- Using most of the available credit.
- Changing your home address frequently.
- Missing payments or regular late payments
- Errors on the report.
Having a high credit score
Whether you need a mortgage or plan to apply for a new credit card, a bank or lender will scrutinise your credit score first. Any lender will look to lend only to individuals that are a low risk so that they can be assured of their repayment. The benefit of having a high credit score is that it indicates an individual is of low risk that makes the lenders more confident to lend to such applicants. Making repayments on time will show reliability on part of the borrower.
Those that have high credit scores are more likely to have their credit applications accepted. Added benefits may include a higher credit limit and attractive interest rates.
Individuals that have low credit scores
Those that have been missing payments or defaulted will find their credit scores to be on the lower side. Having a low credit score increases the risk of being categorised as high risk and lenders are more unlikely to reject credit applications. Even if they do agree to lend credit it will be at a much higher rate of interest or they might outright refuse to give any credit altogether.