What Is A Credit Score?

Knowing in detail about credit scores and their impact on your financial bracket helps you choose the best. Your credit score may change drastically from applying for car finance to paying bills. Your creditworthiness drastically defines the possibility of a loan or getting better interest rates.

Whether you are a new resident in the UK or want to start your financial management journey, a credit score is essential. The blog covers detailed aspects of credit scores and improvement tips from the expert’s perspective.

What does credit score imply?

A credit score is a number one gets after evaluating parameters like- existing bank account, credit cards and payments, debts, name on the electoral roll, joint account, current and previous address, employment history, and business or home address. It also undertakes CCJs, bankruptcy, loan defaults, and missed payments. It may impact the overall score.

Precisely, a credit score represents the ability to manage bills and debt repayments on time. A high credit score indicates well-managed finances with minimal dues or discrepancies. Likewise, a low credit score implies imbalanced payments ( missed payments, CCJs, credit card defaults, bankruptcy, absence from the electoral roll, and impermanent address.) It is also known as a bad credit score that limits the chances for low-interest rates. 

Credit agencies calculate credit scores and report them to lenders. Lenders evaluate it to analyse whether to lend to you or not. A borrower may have different credit scores as agencies undertake unique parameters to calculate them. It does not vary significantly. 

 What is a Good Credit score? Why does it matter?

3 prime credit agencies in the country (TransUnion, Equifax, and Experian) calculate credit scores and report them to lenders. As per Barclay Cards, launched by Barclays, a 300-year legacy of financial services, “Experian is the largest Credit Reporting Agency in the UK. Their scores range from 0-999. Under this, a credit score from 886-999 is considered a good credit score.”

Credit score	Implication
961-999	Excellent score. You can qualify for a better mortgage, car finance, and low-interest credit cards
881-960	Good score. You can get competitive loans and credit cards but not the very best deals
721-880	Fair score. You may qualify for OK rates but may not get the best credit cards, mortgage or car finance, etc.
561-720	Poor score. You may struggle to get credit cards or loans. If you qualify, you may get high-interest-rate loans
0-560	Very poor score. Lenders may reject loan applications, credit card requests, or additional limits. You may need a collateral, guarantor, or co-signer to qualify for long-term loans (mortgage).

 

Lenders analyse the information on your credit report whenever you apply for a credit/loan. It is a booklet that includes several parameters like- new loans, old loans, pending debts, employment history, credit cards in your name, default, and utility bills. You have a good credit score if you have low debts, no pending credit card or utility payments, and an updated electoral roll and address.

While a good credit score does not imply guaranteed loan approval, you share a high chance of qualifying. 

Advantages of having a good credit score

A good credit score helps you achieve your life goals, like purchasing a home, car, home renovation, business office space, etc, without difficulty. Here are some benefits of a good credit score:

• Higher credit limits on credit cards
• Low-cost/interest mortgage
• Flexibility to borrow more amount
• Better and affordable rental options
• No need for a guarantor or collateral to get a loan
• Flexibility to choose repayment structure

  How to build a good credit score?

A high credit score helps one gain the trust of the lender.  It helps you get a nod for your different life goals like- financing business needs, home renovation or improvement, or short-term payday loans. You can save money on interest rates by paying low repayments in comparison to bad credit score holders.

According to Rod Griffin, Experian’s senior director of consumer education and advocacy, “ Your credit score represents the quality of your credit history. Just like a grade on a paper, it helps predict the likelihood of you repaying the debt.”

If you have a low credit history but want to optimise for affordable loans and credit cards, here is the way to improve your credit score quickly.

1) Pay your bills timely

Missed or late payments may impact your credit score. Pay your utility bills like mobile recharge, electricity, and credit card payments on time. Set up direct debits to track the repayment of debts. It will help you keep your credit score healthy and avoid unnecessary troubles. You can select some substantial debts like- credit card debts, mortgage payments, and payday loan payments, and pay these timely.

2) Update your electoral roll

As per Fenland.Gov.uk, “One must register for electoral roll to get a quick response from credit agencies.” It is essential for both new and old credit holders. It is one of the best ways to improve your credit score. While registering for the electoral roll, check details like- spelling and add the address in the correct format.

If you are a regular UK citizen eligible to vote, you can register for the electoral roll by contacting the local council. Getting approval on the electoral roll may impact your loan applications and credit score. On the other side, it may be a powerful addition to credit scores.

As per Experian Consumer Expert, “In numerical terms, registering on the electoral roll increases your credit score by 50 points.”

In this way, an electoral can help you more than just revealing you as a citizen of the country.

3)Remove your name from joint accounts

As per Money Helper,“ Joint account links with another person may also harm your credit score. Breaking this financial link with the one with poor credit improves credit score”.

For example, if you share a joint account with your wife but she has low credit than yours, the mention impacts your credit score.

It is thus advisable to remove the name from the joint account if you do not use it often. It will help optimise your credit score and qualify for better loan rates.

4) Do not withdraw cash from credit cards

Withdrawing cash from credit cards drastically impacts the credit score. In case of urgent cash requirements, switch to short-term loans like- quick loans or payday loans for your needs. The facility is cheaper than credit cards. 

As per consumerfinance.gov. “ Withdrawing extra money from a credit card can negatively impact your credit score. It may indicate poor loan management to a lender. It is when you have multiple applications in your credit report within the shortest period.”

Moreover, depending on credit card terms, they may charge a percentage of the penalty with additional ATM fees. Check for the minimum amount with your family, friends, or savings. Do not liquidate the credit card for extra cash. 

5) Lower your credit Utilisation Ratio

The credit Utilisation Ratio is the percentage of income to debt. It affects your credit score drastically. You must stick to essential expenses like medical, food, and home necessities. As per MoneyNerd, “ Debt to income ratio under 20% is considered as very good. With this figure, you may qualify for affordable mortgage solutions.” Thus, minimising credit card usage, paying off debts, and ensuring the gap between loan applications may help improve Credit Utilisation Ratio.”

Bottom line

Thus, this article briefs about the credit score and its impact on life goals.  You can ensure a  good credit score by chasing these tested expert tips.  An impeccable credit score can help you qualify for low interest on loans. If you have bad credit, wait and improve your credit score. It will benefit your credit report and optimise your finances.