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Understand your credit score

Understanding your credit score

When it comes to a person's chances of being accepted for a credit card, loan, mortgage, car or other item on finance, their credit score is often what will determine the outcome. It's therefore important that we can understand our credit score – from what it is and how it's worked out, to how to find out our own and how often we should check it.

We enlisted the help of finance experts Becky Goddard-Hill, Richard Fenton and Pauline Paquin to put together this guide on credit scores, explained. Becky Goddard-Hill is an author and multi-award winning blogger, who runs the money-advice site, Family Budgeting. Richard Fenton is a finance expert and media writer, and runs the UK Top 10 Business & Finance blog, Doesn't Grow On Trees. And last but certainly not least, Pauline Paquin is the writer behind Reach Financial Independence, featured on the likes of Business Insider, The Huffington Post, Forbes and Mint.

What is my credit score?

Your credit score/rating starts after six months of credit usage, balancing the information in your financial history. It's worked out by using information from your credit report, and some credit reference agencies (CRA) use it to give a simple, numerical snapshot of your credit status. Each CRA has their own way of using the information to create your score.

This is then used by lenders to work out your credit score using factors important to them. They use the credit report from the CRA but also your application form and will take into account any previous dealings you've had with them.

A low credit score shows that you are likely to have trouble making all of your payments – and you would therefore be a high risk to a business. A high credit score shows that they will likely view your application positively.

Credit rating vs credit score

'Credit score' and 'credit rating' are often used interchangeably – because they both measure how likely a lender is to give you credit – but there can be some differences. A credit score is always specifically a numerical value, though the scoring system and scale can vary. A credit rating, however, can be a number, letter or any other type of grading. Importantly, there is no universal way to judge how credit worthy a lender finds you, so where one company may accept you, another may not.

How to check credit score?

You can find out your credit score to get an idea of how lenders will view your applications by getting in touch with any CRA and asking for a copy of your credit file. This costs £2 and you will always be well within your rights to see it – they cannot refuse to show it to you. The three credit reference agencies are:

  • Equifax
  • Experian
  • Callcredit

Once you have spoken to the CRA, they will have seven working days to send you the file. It may take longer if they need extra information from you, so always make sure you have the following to hand:

  • Your full name
  • Any other names you've been known by e.g. your maiden name
  • Your address and postcode
  • All other addresses you have lived at within the last six years
  • Your date of birth

These days however, there are some handy apps that can do this for you, too. Paula recommends Clearscore: "This will let you monitor your credit score for free and update every month, so you can have a clear picture of where you are at." Richard is also advocate of Clear Score, as well as Noddle, which is "an easy to use app and a great way to be able to check in frequently and for free."

Once you've got this information, you can check whether your credit score is likely to be considered a good credit score here.

How often should you check your credit score?

How often you check your credit score is up to you, and could depend on things like whether you're actively trying to build up a good credit score, or are planning to apply for credit in the near future. But all our experts agree it's wise to keep an eye on it – be that once a month or at least a couple of times a year – for a number of reasons.

We often hear people complaining that checking their credit score could go against them. The theory is that by checking your own credit score, you will get a mark against yourself. As Becky tells us, however: "it's a myth that it affects your credit rating if you check your credit score."

So why is it so important? Paula suggests that, "Checking your score regularly is important to see where you stand, and ensure you have the best score possible."

If you don't do this, you may be surprised when a business that you are applying to for financial services is not able to give you what you want. For example, the following may be affected:

  • Mobile phone contract
  • Credit card
  • Car insurance
  • Mortgage
  • Bank account
  • Car on finance
  • Loan
  • Store credit

Becky echoes this sentiment: "You need to be able to ... update any details and see that your credit is in a good state. It can impact a lot of the big financial decisions in your life such as if you can get a loan or a mortgage, so you do need to be sure it's in good order."

What should I do if my credit file is inaccurate?

Another reason for checking your credit report is inaccuracy. "Credit reference agencies compile a lot of information about you, and you want to make sure everything is accurate," says Paula.

An inaccuracy on your record could merely be a simple error, but that's not all. As Richard points out, "it's to keep an eye on anything unusual such as applications you didn't make – as this could be a sign of attempted ID fraud."

If you do spot an anomaly, the first thing to do is contact the credit reference agency and let them know. It may be a simple fix, but be prepared, as it may not be a mistake that the CRA has made. It's likely that they were sent the wrong information by businesses that you have dealt with over time. If that’s the case, you will then need to go directly to them.

If this doesn't work, you can try contacting the Information Commissioner's Office:

The words 'credit score' can often send us spinning into a panic, but it needn't be that way. By understanding how credit scoring works, you can keep track of your own and take the necessary steps to make sure you’re in control. That way, there should never be any nasty surprises coming your way.