CREDIT

Credit Scores 101

by Nikos Melachrinos
May 18, 2020
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One of many things we were never taught about money and finances, credit scores are probably the worst. 

What is it?

Your credit score tells banks and loan providers if  you are low or high-risk  to receive a loan. This will impact whether they accept you for an overdraft, a mortgage, a car loan, or other personal loans. Having a low score means you’re considered “risky” and will likely result in getting a worse interest rate on your loan, even if approved. There are very specific things you can do to increase your credit score and we’ll cover them in this article.

Where do I find my credit score?

There are 3 major credit reference agencies in the UK that all lenders use to get your credit score from. These are Experian, Equifax, TransUnion. They all use a slightly different number like 0-999 or 0-600 as the score. There are ways to check  your credit score for free from all three agencies. (Fair warning: Quite a bit of data is required to verify  you so it takes a few minutes to go through the process)

Equifax: Use Clearscore for free

TransUnion: Use CreditKarma for free

Experian:  You need to do it on their website. Use  their free trial and make sure you cancel it afterwards.  

 

Why should I care?

The thing with credit scores is that they will affect your ability to get credit in the future. A big factor that agencies use to calculate your score is your history of borrowing and repayment. You shouldn’t wait to have something to show for, otherwise, you’re likely to get rejected if the first time you try to get credit is on your  mortgage. So for example, getting a credit card earlier on and being smart about how you use it will make a difference.  It’s hard to improve your score over a short period of time, so start early!

 

What should I be doing?

A good credit score generally comes from a history of managing money responsibly so it’s good to be able to show a track record of timely payments and sensible borrowing. 

  1. Use Direct Debit: pay things like your water bill, electricity, council tax, or mobile/internet via direct debit. Regular payments = good
  2. Get a credit card, don’t get close to its spending limit and always pay it on time, fully: You can look here for which credit card to get, but the idea is to only charge a few things on it to stay well below your credit limit and then repay it. Having a credit card = good. Using much less than your credit card limit = good. Paying your credit card in full and on time every month = v good.
  3. Register to vote in your address: This is a bit WTF but it’s used to verify your address and improves your credit score massively.
  4. Use your rent payments to build your credit. Your rent shows consistent monthly payments and is a great way to build up your score. Use a free service like CreditLadder to have your rent reported to credit agencies.

 

Busting some myths

  1. Paying only the minimum payment is good. NOPE! Credit card companies make  you think  that you only need  to pay the minimum  amount every month, but in reality they charge you interest when you  don’t pay your balance in  full.
  2. Checking your credit score often will decrease your score. LIES! You can check it as often as you want. Unexpected things that can decrease your score are opening up multiple new bank accounts, and applying for new credit very often.  

 

*Bonus* A hack to improve your score

Borrowing more than you can afford is a no-no for your credit score, and so getting close to your limits, whether that’s the limit of your overdraft or your credit card limit is not great form. The credit agencies use a term called “credit utilization” to see whether you're near your limit. If you have a credit card with a £1,000 limit and your balance is £500 then your credit utilization is 50%. It's good to keep this number low, like at around 30%. The trick is that your limit adds up across all credit lines you have so... you didn’t hear this from us, but getting a new credit card that you don’t use will increase your overall limit. Say you got a second card with a £1,000 limit your total limit is now £2,000 and your utilization goes down to 25%, assuming you're not spending anything on the 2nd card. It’s even better to use that credit card for just 1 payment, say your spotify subscription, and pay it back every month in full. If you don’t want the hassle of opening a new account, ask from your current credit provider to increase your limit. 


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