Credit Rating
A credit rating is an assessment of the creditworthiness of a borrower, generally in terms of their ability to repay loans. This is used by lenders to evaluate the risk of lending money to an individual or entity. In the UK, credit ratings are often expressed through credit scores provided by credit reference agencies such as Experian, Equifax, and TransUnion.
Lenders use credit ratings to decide whether to approve credit applications, such as loans, mortgages, and credit cards. They also use these ratings to determine the interest rates and terms of credit.
Credit reference agencies compile credit information based on your financial behaviour, such as repayment history, outstanding debts, and the length of your credit history. They then assign a credit rating or score.
Credit Score
A credit score is a numerical representation of your credit rating, reflecting your creditworthiness. It’s calculated based on information in your credit report, such as payment history, debt levels, the age of your credit accounts, and other financial behaviors.
- Experian scores range from 0 to 999.
- Equifax scores range from 0 to 1,000.
- TransUnion scores range from 0 to 710.
The higher your credit score, the more creditworthy you are considered by lenders. This typically leads to better interest rates and easier approval for credit.
Good and Bad Credit Scores
Good Credit Score
A good credit score varies slightly depending on the credit reference agency, but generally:
- Experian: A score of 881 to 960 is considered good, and 961 to 999 is excellent.
- Equifax: A score of 531 to 810 is considered good, and 811 to 1,000 is excellent.
- TransUnion: A score of 604 to 627 is considered good, and 628 to 710 is excellent.
Characteristics of a good credit score:
- Regular, on-time payments for loans and credit cards.
- Low credit utilization (using a small percentage of available credit).
- Long credit history with various types of credit.
- Few or no negative marks like defaults, bankruptcies, or county court judgments (CCJs).
Bad Credit Score
A bad credit score is generally:
- Experian: Below 561 is considered very poor, and 561 to 720 is poor.
- Equifax: Below 438 is considered very poor, and 439 to 530 is poor.
- TransUnion: Below 566 is considered very poor, and 566 to 603 is poor.
Characteristics of a bad credit score:
- Late or missed payments.
- High levels of debt compared to credit limits.
- Limited or very short credit history.
- Negative marks such as defaults, bankruptcies, or CCJs.
How a Credit Score Affects Your Life
Impact on Borrowing
- Loan and Mortgage Approval: A good credit score makes it easier to get approved for loans and mortgages. Conversely, a bad credit score can lead to declined applications or higher interest rates, which increases the overall cost of borrowing.
- Credit Card Approval: With a good credit score, you can access credit cards with better rewards, higher credit limits, and lower interest rates. A bad credit score might restrict you to basic cards with higher interest rates and lower credit limits.
- Impact on Insurance: In the UK, some insurance providers use credit scores to help set premiums, particularly for car insurance. A poor credit score might result in higher premiums.
- Impact on Renting: Landlords and letting agents often check credit scores when assessing potential tenants. A good score can make it easier to secure a rental property, while a bad score could lead to higher deposits or even rejection.
- Impact on Employment: Some employers, particularly in the financial sector, may check your credit history as part of their hiring process. A poor credit score might be a red flag, especially for roles that require managing finances.
- Utility Services: Utility companies (electricity, gas, water) might check your credit score before offering you a service. A poor score might require you to pay a deposit or use a prepayment meter.
- Interest Rates: A good credit score usually results in lower interest rates on loans and credit cards. This reduces the overall cost of borrowing. A poor score, on the other hand, typically means higher rates, increasing the cost of any credit you receive.
Improving a Bad Credit Score
If you have a bad credit score, there are steps you can take to improve it:
- Pay Bills on Time: This is one of the most significant factors affecting your score.
- Reduce Debt: Pay down existing debt, especially credit card balances, to improve your credit utilization ratio.
- Avoid Applying for Too Much Credit: Frequent credit applications can negatively impact your score.
- Check for Errors: Regularly review your credit report for errors or signs of fraud and dispute any inaccuracies.
- Register on the Electoral Roll: Being on the electoral roll at your current address can boost your credit score.
- Get the bad credit credit card.
Understanding and managing your credit score is crucial in maintaining financial health, ensuring access to credit when needed, and securing favorable terms when borrowing.
