Credit scoring can be extremely complex and confusing for people who have never come across credit ratings before. Even if you don’t understand all of the detail around credit cards – and to be honest, you don’t really need to – most of us know that having a healthy credit score helps you get loans, credit cards and other credit products. Loans and mortgages may seem a long time off when you are a student, but it’s never too early to start thinking about steps you can take now to create a healthy credit history and make things easier when you finally get to the stage of buying property or taking out a car loan.
What Is a Credit Score?
In the most basic terms, a credit score is a grade given to you by lenders to decide how much of a risk you are.
If your credit score is very low, the banks might decide that you are too much of a risk. They may either refuse to deal with you at all, or only offer you products with much higher interest rates than they offer to customers with better scores. The three main agencies which manage credit scoring in the UK are TransUnion, Equifax, and Experian, and these operate independently from the banks and other financial organisations. Using a wide range of information, the credit reference agencies will assess all the information they have about you and come up with your credit score number. As each agency uses a different scale, numbers will be different on each site.
What Affects My Credit Rating?
The credit agencies look at a wide range of things when deciding how much of a risk you are. Perhaps the most important of these factors is your track record – have you made payments regularly in the past, indicating that you can be trusted with credit? Student loans are not included in this. They will also look at the amount of credit you have available to you, and how much of it you’ve used. You’re in a stronger position if you aren’t permanently living in your overdraft, with a maxed-out credit card. If you have made several applications for more credit in a short period then this might go against you too, as it creates the impression that you are in financial difficulties and desperate to access more funds.
Another of the main factors which affects students is whether you are registered to vote at the address where you are applying for credit. This often causes problems for students who are registered to vote at their parents’ address, but who apply for a credit card or mobile phone contract using a student hall of residence address.
Length of Credit History
Students often find they have a low credit score simply because the credit referencing agencies don’t have enough information to form an opinion on whether you’re a good risk or not. It’s never too early to start thinking about steps you can take to improve your track record with credit referencing agencies. Having a mobile phone on a pay monthly contract can help, especially when you set up a direct debit to make sure it’s paid every month on time without fail. Insurance policies for home or car where you pay monthly rather than in an annual lump sum are also classed as credit agreements. Managing these sorts of products well, never defaulting or making late payments, should help you establish a good track record during your time at university, which stands you in good stead for when you start work and think about taking out larger amounts of credit in loans or mortgages.