Here we cover how credit reports work and why your score matters. And don't worry — we won't go into any financial jargon or include pages full of complex numbers. In this blog, we're keeping financial terms simple.
So what's a credit score?
Your credit score is a number between 0 and 1,000 that (in essence) lets lenders know how good you are at paying your bills on time. This is a bit of a simplification, but it helps explain the primary purpose behind your credit score.
High scores are good scores. A score of 0 is not so good, and a score of 1,000 means you're perfect, with lots of positive repayment history to show.
Most people will score somewhere between 300 and 800, and scores between 580 to 670 are pretty average. Anything above 700 is good — anything above 800 is excellent. The higher your score, the more likely you are to be able to secure access to credit amounts (that's money loaned to you) at a reasonable interest rate (the amount charged on top of the loan).
Who checks my credit score?
The banks are — and telcos. Also, utility companies and possibly even your landlord or future boss.
Your credit score is a significant indicator of how good you are with your money. A lousy score tells lenders (or employers) that you're not so trustworthy when it comes to paying bills. Which means they'll be less likely to offer you a loan, phone contract or even a rental agreement (for landlords).
A credit score is one way of checking whether you're worth the financial risk. Ever wondered why you're stuck paying higher interest rates than some of your friends? Well, they've likely better credit scores, and so lenders consider them less risky than you.
So what makes up my score?
A lot of information is taken into account with a credit score. It's a summary of your repayment history, including how much you borrowed and when you paid it back. Was it on time, and did you pay it back in full?
Your score takes note of any existing bills, credit cards and loans you've got waiting to be paid off. These range from personal loans to hire purchases and even your phone bills.
How do I make sure my score isn't terrible?
There are a couple of things you'll want to keep an eye on.
Lenders will be looking out for records of late payments and defaults. Would you want to lend someone money if you know they're probably not going to pay it back? Possibly not. The worse you are with paying your debts back on time, the more your credit score will drop.
Opening lots of new accounts and applying for many loans over a short period is another negative. It makes you look desperate for credit, which suggests you're probably not great at looking after your finances and paying back what you owe on time.
Your credit score is a way for lenders to know what kind of a borrower you are. And with less information, it's harder for them to work that out. That's why anyone older who has been paying their bills responsibly over decades tends to have higher credit scores than someone fresh out of high school.
How do I fix a bad credit score?
There are many things you can do to get your score up. Your score is affected by both positive and negative borrowing behaviour — which means that if you're handling your loans and managing your money right, you can push those numbers up and get great rewards for your hard work.
Pay your bills.
This one's important. Late and missed repayments have a significant impact on your credit score. Did you know that defaults can stay on your credit report for up to five years? That's a long time to clear out (plus, they'll run up interest, which costs even more).
Put your payments on direct debit if you can. That's an excellent way to make sure they go through on time without any risk of you forgetting about them.
Avoid taking out too many loans when it isn't necessary, as you may need a loan for an emergency —like when your car breaks down. The more loans you have, the more repayments you must undertake, including the interest costs. And the fewer loans you have, the easier it will be for you to remember them, which means there's less of a chance that you'll miss a payment.
You should check out your credit report for any mistakes. If you see, it's time to get in touch with your credit provider and have the error amended.
Your credit score is a number that tells lenders and other providers how good you are with your finances. Set between 0 to 1000, your score will fall into a 'range', like 500 to 600, which at a glance tells you whether you're likely to get out a loan or secure a low-interest rate.
It's easy to make changes to your score — it just takes time.