One of the many things that debt can affect in your life is your credit score.
This is arguably one of the biggest factors of struggling with debt because it’s the deciding factor when you apply for credit. It’s looked at by all lenders to allow them to determine your ‘creditworthiness’.
Credit scores are generally available online and you can find it out in just a few clicks. But, understandably, it can become a bit confusing, so we’ve created this handy guide for you to explain what it all means and the steps you can take to improve your score.
What is a credit score?
Your credit score is calculated by the three main credit reference agencies; Experian, Equifax and TransUnion. Once it’s calculated, you are given a three-digit number based on your previous borrowing history and your current borrowing habits.
This is then attached to your credit file. This is what is looked at by lenders when you make a credit application and it will take into account things such as:
- Any unpaid debts
- How much credit you have available – i.e. if you have maxed your limits
- Your overall debt level
- If there are any defaults on any of your debts
For the most part, it will be the most recent of these details that lenders will be interested in. However, your report will hold a record of all these details for a total of six years.
If there are any negatives on your report, this can be a red flag to lenders when making decisions on your credit applications. This can result in being rejected or being charged higher interest rates as you will then be seen as a higher risk for borrowing money.
What’s a good credit score?
How your score is rated is different across the board. Each company will have their own way of doing this which means it may look more favourable in some places than others.
But, as long as you have a good credit score with one of the three main reference agencies mentioned above, then you will be considered a good credit candidate by lenders.
A good score for each agency is calculated as follows:
- Equifax: anything above 660
- Experian: anything above 700
- TransUnion: anything above 720
It’s important to remember, however, that this does not guarantee that any credit application you make will be approved. There are usually other factors taken into consideration when making the decision to lend to you and it will never be purely based on your score.
The information that is held on your credit report will differ depending on what reference agency it was generated by. As such, it’s always best to check all of them to give yourself a better overall picture of your credit profile.
Generally, credit reports will hold the following details:
- Personal details such as your name, address, date of birth etc.
- A trail of any credit search done by any lenders during credit applications
- If you are on the electoral roll at your address and how many years you have been there
- Any defaults you have on any of your accounts
- How much you owe to any lenders
- Details of any joint accounts you have with anyone
- Any unpaid county court judgements (CCJs)
- A marker showing if you have been subject to bankruptcy or insolvency
Information about things such as your wages, student loans council tax or criminal record (if you have one) will not be held on your credit report. However, in some cases, you may be asked for these details when applying for credit and they may be considered alongside the information on your report.
How can I improve my credit score?
If your credit score is low, there are things you can do to build this up. We’ve laid some of these out for you below:
- Check for mistakes
This is one of the most important things to check for on your credit report. If even just a small detail is wrong, your score can be impacted, so make sure you check regularly that all your details are correct.
- Don’t get caught out by fraud
Now you’ve checked all your details are correct, it’s then time to check for any accounts or applications that could be fraudulent. If you notice anything that you either didn’t apply for or is incorrect, flag this not only to the company in question but to the credit reference agency as well to have it removed.
- Make your payments on time
Now, this one may seem like an obvious one. But paying your bills on time is one of the best ways to show to lenders that you can be responsible with your money and pay back borrowed money.
- Don’t max your limits
Understandably, you usually take on credit to use it, but a great way to help boost your score is not to max out any limits you have, such as a credit card. The less available credit you use, the more this goes in your favour to future lenders, which will ultimately improve your credit score.
- Clear what debt you can
If at all possible, it’s best to pay off as much of your existing debt as you can before you apply for any new credit. This will not only improve your score but also lower the risk factor for lenders to then approve your application.
If you’re unsure about your credit score and your debts, talk to TAD today. As our resident expert, he can help you diagnose your debts and offer you advice tailored to your situation.