People often believe that the only time it’s important to earn a good score is during school. Getting high scores on exams as a young student ensures the opportunity to secure a good education moving forward, which in turn increases the chances of finding a well-paying job that makes it possible to afford all the luxuries in life when scores are no longer a factor.
The truth is, however, that scores are always important. They’re just of a different nature after graduation. In the real world, as life after graduation is often called, credit scores are just as important as those earned in school. In fact, they’re more important for they hold more weight. From job prospects to buying a home, a person’s credit score impacts every aspect of their life.
What is a Credit Score?
In the UK, a credit score is a numeric figure banks assign to an individual when assessing their risk level as a borrower. When a person applies for a loan or credit, each lender runs an independent risk assessment and assigns a score to the individual. There are also, in the UK, agencies that specialize in tracking credit histories. These agencies, based on the data they gather, also assign a credit score to individuals and make that information available to prospective lenders.
Given that both lenders and specialized agencies assign their own independent scores, it’s important to note that a credit score isn’t a single unchanging number used by everyone wishing to determine whether or not a person is a financial risk. While the score assigned by credit agencies may play a role in a bank’s decision of whether or not to grant a loan or extend a line of credit, it’s not the sole factor. Furthermore, each bank’s credit score is private and made available only to the person requesting a loan.
An additional point worth mentioning is the fact that each lender has their own criteria for determining credit worthiness. Thus, while one bank might give you a high score when applying for a credit card, another might assign a low score and reject a mortgage application.
How a Credit Score is Determined
As mentioned above, there are often different criteria for different types of loans, thus achieving a high score across the board is more challenging. Regardless of the specifics, however, there are a few characteristics shared between credit-worthy borrowers, regardless of the institution issuing a score.
Have an established credit history. While everyone fears the consequences of a bad credit history, often overlooked is the effect of no history. Though with the latter banks have no proof that you’ve failed to pay bills on time or accrued multiple delinquencies, there’s also insufficient proof that you haven’t. This is one of the instances in which no news is actually bad news.
There are many reasons a lender might consider you a risk if there’s no credit history for them to review. For starters, anyone without a history is a risk because lenders have no proof that you won’t fall behind on payments or stop them altogether. Additionally, failing to establish credit, particularly for older individuals, might reflect a lack of responsibility or maturity on the part of the borrower.
Maintain a low debt-to-credit ratio. This is the secret formula to having good credit. Ideally, borrowers should maintain a ratio of 1:3, or 25 percent. In other words, if your combined credit line is $10,000, the maximum outstanding balance should be 25 percent of that figure or less, or $2,500. Such a low ratio will guarantee a high credit score when the only criterion is a positive credit history.
Be vigilant about your credit and regularly monitor reports for any sign of error. Given that one delinquent charge to your credit report can potentially drop a $5,000 credit limit to $500, it’s important to monitor your credit against any errors. The best way to do so is by signing up with one of the credit agencies in the UK, which are Experian, CallCredit and Equifax. For a monthly fee, users are given their credit score and have access to their credit report.
Each company scores differently, so for the most comprehensive assessment of your credit it’s best to subscribe to all three. Generally, though, a single subscription is sufficient for tracking changes to your credit report. If ever there’s a questionable change or a mistake, contacting the agency for clarification or correction is the only way to prevent a sudden drop in your score.
Factors that Affect a Credit Score
While your credit history tracks your spending habits and ability to pay, there are other factors that lenders and credit agencies take into consideration when assigning a credit score.
Age – Even with excellent credit, a lender might consider you a risk due to your age. Typically, younger borrowers are affected most by this.
Employment – Your employment status directly influences a bank’s decision of whether or not to approve a loan. Moreover, the type of employment, whether or not it’s steady and your salary are all factors.
The ability to confirm your identity and contact information – Because lenders need to verify your identity before they can approve an application, it’s important to make sure you’re providing your most recent contact information. Lenders use the electoral roll to verify information so make sure you’re registered with your local council.
County Court Judgment – A CCJ is an official court ruling that orders borrowers to pay their creditors. These judgments do considerable damage to a person’s credit and stays on their record for six years. The only way to avoid this is to pay off the debt within 30 days after the judgment is issued.
Tips for Maintaining a High Credit Score
Despite the far-reaching implications a credit score has on your life, it’s ultimately in the control of the borrower to achieve and maintain a high score.
Pay your bill on time – This includes creating a budget and sticking to it. Additionally, for those with large outstanding balances, consider paying more than your usual payment whenever there are sufficient funds to do so.
Regarding your usual payment amount, unless your balance is low, always pay more than the minimum. If a credit application is rejected, do not immediately reapply. Each time you apply for credit, a credit report inquiry is submitted. Such inquiries lower your credit score and each additional application means an additional inquiry. If you are rejected, instead of reapplying, review your credit report or obtain your score from a credit agency to determine why you were rejected as well as how to improve you rating. Additionally, ask the lender for an explanation regarding your rejection since a credit score isn’t always the deciding factor.
Avoid maxing out credit cards but use them often – Since the global recession, credit companies have implemented tougher policies that even affect people with good credit. For example, lenders may now reduce the credit limit of customers who rarely use their credit. Though you might think using cash instead of credit is a good way to maintain a high score, the truth is a lender might view you as an undesirable customer and choose to reduce your credit.
Should a bank decide to slice your credit limit, your total available credit is then drastically reduced and your debt-to-credit ratio will increase, rendering you an undesirable candidate for future credit.