WTF is a credit score?
Well it’s not the sexiest subject, your credit score. And if you haven’t thought about it much, it may well not look too pretty, but one day that credit score could come in proper handy. One day everyone needs a credit score. And a good one is definitely better than a bad one.
First things first though. To get a good credit score, it’s essential to understand exactly what a credit score is. Let’s see if we can clear that up a bit here.
Ok. What is a credit score?
A credit score is created from data held in your credit report (aka credit file). The exact number can differ between lenders, and even products from the same lender. This is because your credit score can differ depending on the criteria being used to assess you. Just because someone’s good to pay you back that tenner from the pub the other night, it doesn’t necessarily mean they’re a great investment for a 25 year mortgage.
Credit history affects everyone’s ability to take out credit products, including loans, insurance, even mobile phone contracts, and perhaps most importantly, that 25 year mortgage.
How do I check my credit score?
Knowing your credit score is like knowing how wide your car is when you park. I mean you don’t have to. But why not? It’s free. And it’s information that the company on the other side of this transaction will have.
There are online tools that some people find helpful to check their credit score, many of these are free to use, though you may have to register. It’s important to remember these are only an estimation from one lender’s point of view, they don’t necessarily give the total picture. However, they could still be an indicator to your financial health and some people find them a helpful way to track their improvements over time.
It’s important to remember that the score you see with a credit reference agency (CRA) like Experian is not necessarily the same score a lender will see. Your Experian credit file may show an excellent credit score but the lender may take into account other factors which will impact their determination of your credit worthiness. This could be things like available credit you have, even if you aren’t spending it.
You can find out what your credit score is at Experian for free here — it takes three minutes to register and see your score in the form of a number from 1 (we need to talk, call me) and 999 (you probably don’t even need credit right now, right?). If you haven’t checked it before, give it a go now. It feels a bit like going to the dentist, but you never know — it might not be as bad as you were expecting.
One thing to note is that wherever you get your credit score from, it’s not the full picture as lenders will use their own criteria and therefore a 999 could turn into a no when it comes down to it. It’s just much less likely to than a 1.
In any case, don’t forget to come back having a quick check. You’re doing great. And the next bit’s riveting. Promise.
What is a credit referencing agency?
Told you it would be riveting.
Well, in the UK there are three credit referencing agencies (CRA), Experian, Equifax, and Callcredit.
A credit referencing agency is a company that creates, and keeps hold of your credit report. They gather information about your credit history and calculate a score based off of this information. Lenders will ask one or more of these agencies for information about you while processing your credit application.
Your score with Experian, Equifax, and Callcredit may be slightly different because not all lenders report to every CRA. The three CRAs work slightly differently, and each have different maximum scores and scales.
What information is stored on my credit file?
The different information the CRAs use has a dual purpose — to make sure that you are who you say you are, and to establish a picture of your financial situation. This is used by a lender to determine a level of risk and appropriate limits, interest and fees on your particular credit product.
They ease you in gently:
Name, address, and date of birth
This includes previous addresses and names.
Search Footprints
These are records of soft or hard credit searches.
A soft credit search is an inquiry that occurs when a person or company checks your credit report as a background check, like if you were to check your credit score using an online checker or if you use a comparison site to compare credit cards. A soft credit check can happen without your permission but does not affect your credit score in anyway. Only you can see them on your report.
A hard credit search is when a company makes a complete search of your credit report. Each hard credit check is recorded on your file and any company searching your report will be able to see them. A hard check may be performed when you apply for a credit card, or a pay-monthly phone contract amongst other things. Too many hard credit checks over a short period of time can affect your credit score.
Financial links to other people
If you’ve got a joint bank account or loan with someone else, this will be visible on your credit file. They are called your financial associates. Other people who live at your address are not automatically financial associates. Lenders may take into account the other person’s credit worthiness when you make an individual application, so it’s important to be aware of people linked to your credit report. The link between you and a financial associate can only be broken (and their name removed from your credit file) if you no longer have a financial relationship with the person and you ask a credit reference agency (CRA), such as Experian, to remove it. If you would like to remove a financial associate from your account you would close the joint financial product and can notify the CRA that you’re no longer financial linked to them.
Any late or missed payments on credit agreements
These are records of all late or missed payments on credit products you hold or have held. If you miss a payment on your credit card, it will show on your credit file and be visible to lenders who run a search of your credit file.
How much money you owe to lenders
Your credit file keeps a record of your total debt and is visible to lenders running a search of your credit file.
Any County Court Judgements (CCJs) against you that are not paid in full within one month of receiving the notice
A CCJ is a judgement that has been issued by the county court when someone has failed to pay money that they owe. It’s a way for creditors to claim money they are entitled to through the courts. It’s visible to lenders running a search of your credit file and can affect your credit worthiness.
If you’re on the electoral register at your current address
The electoral register is kept by The Electoral Commission and keeps a record of everyone who is registered to vote in public elections. It includes your name, address, date of birth, and electoral number. It’s used primarily to determine what consistency you are in and where to send ballot cards.
Its relevance here is that it is also a part of the credit file that helps a lender confirm that you are who you say you are, and that the information you may have provided is accurate. Being on the electoral register and keeping your details up to date could improve your credit score because a lender may see it as a strong factor in authenticating your ID.
If you have declared bankruptcy or entered an Individual Voluntary Arrangement (IVA)
Bankruptcy is a public declaration that you are unable to settle debts. An Individual Voluntary Arrangement (IVA) is an agreement with all lenders that you owe that you will pay all or part of your debts through regular payments to an insolvency practioner, who will divide this money between your creditors. Both of these are visible on your credit file.
You can find unbiased and complete information on debt relief on the UK government website here: https://www.gov.uk/options-for-paying-off-your-debts
What’s good practice when it comes to being aware of my credit file?
Your credit file is usually updated once a month so some people like to check it on that basis. It’s good practice to keep an eye out for mistakes or fraud and raise these with the relevant CRA so they can be corrected.
Always be consistent on credit applications that result in soft or hard checks as lenders may see all information on your credit file, including some information you may have provided to other lenders.
Phew. If you got all the way through that, give yourself a clap. In fact, we’re on medium, so give me us a clap. Go on. Thanks…
Anyway, the first step to getting in control of your finances and feeling better about your financial planning is to face up to the actual situation. And yeah, it’s a bit like the dentist, but it’s always better to know at least the basic picture and to do that you need to get used to having a look in the money mirror from time to time.
Working out what exactly a credit score is can only be a good place to start. Maybe now you’ve done that, you’d like to see our tips on making the most of what you have - 5 ways to improve your credit score.
We have regular content including great tips for managing your money at the Tandem blog, where you can also find our money management app. It uses fierce algorithms and a fair interface to make managing your money feel like you always have a wealth of expertise on your side. It’s pretty sweet. For the moment it’s only for UK bank accounts, but you can check out our blog wherever you’re from.
It’s worth mentioning that we have a whole lot of expertise here at Tandem — from financial service to HR, startup entrepreneurs to advertising execs. So if there’s anything where you want us to go deeper into a subject, tell us in the comments below and we’ll see if we can help.
