The complete guide to credit ratings

A credit score is a 3-digit number that represents how likely you will be accepted for credit. Based on your credit report – a report of how you have handled credit throughout your life – it can determine whether or not you get a good mortgage rate. However, fear not, there are a number of things you can do to improve your rating.

What is credit?

Credit is used to describe the process of borrowing money, with the agreement that you’ll pay it back such as credit cards, store cards, personal loans, utility bills, overdrafts and mobile phone contracts. Lenders are looking for someone who will be able to meet any repayments.

What is a high credit score?

A high credit rating means you are low risk, which is good news. You’re likely to appeal to lenders and have shown officials that you can pay any bills on time. This also means that your credit application will probably be accepted at a cheaper rate of interest.

What is a low credit score?

A low rating means you are at high risk and may not be able to make regular payments. Lenders may offer you a higher interest rate or reject your application for credit. However, it’s relatively easy to improve your rating so don’t panic.

Who calculates your credit score?

Each score is determined by a credit reference agency. There are 3 in the UK – Call Credit, Equifax and Experian. Lenders send each CRA information and data regarding the current credit you have and how you manage it. However public information such as the electoral roll is also taken into consideration.

As there are so many factors making up a credit score, it is difficult to determine your individual level of risk. Individual factors may not directly impact your rating because it depends on what else is in your report. For example, if you miss one payment but have a good credit history, it’s unlikely to lower your score. Different factors have a different impact on your credit rating – defaulting on debt will be viewed more seriously than missing a payment.

What happens if you have no credit?

 If you’ve never borrowed money, only borrowed a little or never owned a credit card, lenders will find it difficult to determine how you can handle credit. This will lead to many lenders assuming you are high risk and offering you a higher rate or no credit at all.

What will affect my credit score?

  • If you own a large amount of credit such as having lots of credit cards
  • If you use over 50% of your total credit limit
  • If you apply for several credit applications in a short space of time
  • Changing address frequently
  • Mistakes on your credit report
  • Public records such as not being on the electoral roll

What factors have the biggest negative impact on my credit score?

  • Frequently missing or making late payments
  • Defaults on debt
  • Bankruptcy

How to improve your credit score

  • Make sure you’re on the electoral roll
  • Close any credit card accounts that you don’t use
  • Set up direct debits for all your payments to ensure you don’t miss any
  • Pay off any personal loans as quick as possible
  • Check the information on your report and make sure it is up to date
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