Whenever you take up a loan or a credit card, it gets recorded into a specific file designated to you. That file is then known as your credit report. This credit report comprises of the information on all finances, including; loans, credit cards, mortgages, car finances, or missed bills. It’s literally a tapestry of your financial life.
Based on this report a numeric score is assigned to you which is called as the credit score. The credit score can be between 0-999.
What Makes Credit Score So Important?
The function of the credit score doesn’t end up by just assigning a numeric value to your credit report; it has a greater significance.
When you apply to any financial institution for any kind of finance, that institution firstly checks your credit report. Your credit score speaks volumes and gives a better idea to the lender about your past financial behaviour; it gives a specific number based on the scale which puts you in a specific category.
The lender tends to examine your credit report as well as your credit score. The former gives them an in-depth information about you and your past and current debts, while the later shows them the highlights. This then gives out characteristics about you based on your credit category, assisting them to assess you and offer you credit packages accordingly.
What Are the Categories of the Credit Score?
Here are the categories of the Credit Scores which are based and assigned on examination of your detailed Credit Report.
Each category has a certain range of numeric value assigned to it to makes it easier to check in which category you belong based on your Credit Score.
Typically these will be the scores:
Excellent (961 – 999)
If your Credit Score comes into this category then you are entitled to get the best credit cards, loans and mortgages from the financial institutions. This category symbolises that you have an excellent past record.
Good (881 – 960)
If your Credit Score reflects in this category then you can get most credit cards, loans and mortgages but the very best deals may not be given to you because of some issue in your past with respect to debt paying.
Fair (721 – 880)
If your Credit Score comes in this category then you might get average interest rates on the loans offered to you, but then your credit limits may not be very high. This may occur due to some average complications in your past record.
Poor (561 – 720)
If your Credit Score lands you up in this category then you might be accepted for credit cards, loans, and mortgages but they may have higher interest rates. This may happen because of major issues related to debt payment and defaults in it which will be reflected in your Credit Report.
Very Poor (0 – 560)
With Credit Score this low, you’re more likely to be rejected for most credit cards, loans, and mortgages that are available. Major complications in your Credit Report caused due to a serious offence in payment of debts may give such low Credit Score.
It’s worth remembering that these are typical score markers but in some cases, these will vary depending on how some companies measure it.
How Would You Check Your Credit Score?
To know your credit score you need to get a copy of your credit report; it is your legal right to get a copy of your credit report. You can get a statutory copy from credit reference agencies such as Experian or Equifax.
You can also pay monthly charges for a credit monitoring service from any of the credit reference agencies. This will provide you with an access to more detailed information about your credit report and will also alert you if there is any unusual activity happening in your account.
You can also log onto online platforms or websites which can do credit score checks for you by accessing your files from all the institution from which you had taken finance on credit.
Know Everything That Affects Your Credit Score
There are various ways by which your credit score can be altered negatively. If you have missed out on payment of your debts or direct debits even once then it will be reflected in your credit record and this will edit your credit score adversely.
If you are late with payment of your debts or are shown as paying minimum debts per month then it suggests that you may be struggling to keep up with your personal economy and are having problems paying the debts and this too can cause problems.
You will almost certainly end up with a low credit score if you are declared bankrupt or enter into an Individual Voluntary Arrangement (IVA). Lenders are also wary of borrowers who have a County Court Judgment against their name.
People who have never taken out a line of credit also land up with bad credit score. The reason for this is that the lenders can’t gauge the new customers, since there is no past history of them to support their claimed characteristics of the payment of debts, the lenders cannot take risks by giving such new customers the best credit options.
Being a model customer can also land you in the problem of having a low credit score. People who borrow only small amounts or who prudently pay off their credit card bills in full each month are not profitable for lenders, so are often turned down for credit.
How to Improve the Credit Score?
It is necessary to keep your credit score high in order to get better credit from banks and for that you need to put some efforts to increase it.
To have a great credit score you need to keep chipping away at your bad credit. As mentioned earlier, you can access your credit report anytime you want, which means you need to keep checking your file. Errors happen and can kill applications, so it’s important to check your files regularly and to go through them line by line to check nothing’s wrong. If possible, check files at all three agencies as different lenders use different agencies – and don’t assume the info will be identical on each.
If you aren’t eligible to vote and can’t be on the electoral roll you need to send all three credit reference agencies proof of residency (utility bills, a UK driving licence, etc) and ask them to add a note to verify this. This should help you get credit.
If you have any joint financial product, then you need to make sure that the person with whom you hold a joint product has a good credit score. If your partner has a bad credit score and bad credit report history, then they might cause you problems because due to their lesser score you too will get less credit score.
If you get rejected for any credit then it is essential to recheck your credit report file and fix the errors in it or you might keep getting low credit score thus not entitling you for a good credit.