Maintaining sound financial health requires that you track and evaluate your spending, saving, borrowing, and planning activities. How you handle these activities can either enhance or distract your ability to pursue and seize opportunities as they arise.
One of the questions that often get asked is – What are some of the things you can do now to ensure your financial ducks are in a row? Well, there are several of them but one of the most common and easy to implement is checking your credit report! It is important that you know your credit score and how it impacts your financial profile.
What Is a Credit Score?
Your credit score is your creditworthiness stated as a three-digit number (0-999). This number distils your borrowing and in particular your repayment behaviour. If you use credit and repay in full and on time and have done for many years then your score will be high.
If you have a good credit score, you’ll find it much easier to get approved for credit facilities including credit cards, auto loans and mortgages. On the other hand, having a bad score can stop you from getting approved especially by mainstream lenders such as high street banks. Luckily, some lenders may still consider you even with bad credit through facilities such as guarantor loans, bad credit personal loans and bad credit car finance.
In case you are wondering where your credit score comes from, it is derived from your financial history compiled by the UK’s three main credit reference agencies (CRAs). These agencies are commercial organisations that collate information including details of your credit accounts, physical addresses, repayment history, and financial connections with joint account holders into credit reports.
Depending on the credit rating agency (Equifax, Experian, or TransUnion) that you go to, you may get a slightly different version of your credit report. The reason behind this is that lenders do not always share the same information with all the three main CRAs.
What Goes into Your Credit Score?
Credit scores are calculated based on several factors that help determine your ability to service credit responsibly. Knowing these factors is important as they can help you to improve your financial profile and subsequently your credit score. Here is a quick run of the factors that serve as inputs into credit scoring models.
- Payment History: How you repay loans and other forms of credit have an impact on your score. Missed payments raise a red flag, warning lenders about your ability to repay debts on time. Your payment history accounts for about 35% of your score.
- Credit Usage: Your credit utilisation ratio which shows the percentage of your available credit that you are using is an important component of your credit scoring. If you are using more than 30%, lenders will become cautious when advancing credit to you because of your increasing reliance on non-cash funds.
- The Length of Your Credit History: If you have credit accounts in your name, the length of time you’ve held those accounts matters in credit scoring. Older credit accounts will boost your rating and show you up as a responsible borrower. About 15% of your score is derived from this factor.
- Portfolio of Credit Accounts: Having a diverse credit mix will help boost your credit scores as it shows the range of the different types of credit you can handle. Credit accounts considered include credit cards, auto loans, home loans, student loans among others.
- Recently opened credit accounts: When you apply for credit, lenders often make hard enquiries. When you have too many of these enquiries, they can hurt your score as they portray you to be a risky borrower. If you have a problem getting approved for credit facilities, you can check out licensed credit brokers who will help you access bad credit loans that don’t entail hard enquiries.
Check Your Credit Report Annually
The best practice is to check your credit report at least once every 12 months. Also, before you apply for credit, you must go through your credit report to ensure you understand every entry.
It is not uncommon to spot a few errors in your credit report. If not picked up, these mistakes can lower your chances of getting top credit deals. Some of the mistakes to look out for include:
- Loans that appear as unpaid even though they have been paid
- Erroneous reporting of current debts as being up for collection
- Incorrectly captured addresses and personal information
- Someone else’s information appearing on your credit report because of mixed files
In addition, malicious and fraudulent credit applications could have been made in your name without you being aware. As you go through your report, you will be able to single those out if any. No one will penalise you for requesting and checking your credit reports. You can do it as often as you please.
Check Your Credit Report for Free
Initially, you had to pay £2 to access your credit report. However, things have now changed and there are ways you can get your credit information for free. Here are some of the options you have.
Statutory Credit Report
Under the terms of the General Data Protection Regulation (GDPR) and Consumer Credit Act 1974, consumers have a statutory right to access a free credit report (it used to cost £2) at least once every year. The information you’ll receive include missed payments, details about your credit accounts, and people you have financial links with. You can opt to have your Statutory Credit Report delivered via post or access it online.
Through Credit Karma UK Limited, consumers can get lifetime access to their credit scores and reports based on TransUnion. You just need to fill in your details and go through a few instructions to complete your application.
Clear Score Technology Limited also gives its users free Equifax credit reports and scores updated monthly. You only need to provide some basic details and you’ll be signed up.
MSE Credit Club
MoneySupermarket.com Financial Group Limited through its MSE Credit Club gives its users free Experian credit reports and scores. The reports are updated once every month.
In addition to the free information, you can opt to go further and subscribe to paid services that give you access to your credit information from all the Credit Reference Agencies. You get a complete picture of the information each CRA holds about you. You’ll also get fraud monitoring services, victims of fraud team support, guidance and customer service support online and via phone from Credit Analysts based in the UK.
Your credit score is your financial heartbeat. It helps you quickly check your financial health and give you pointers on what you need to do to plan and improve your credit profile. Understanding the factors that determine your credit score and the importance of regularly checking your credit report will help you plan your finances. There are free sources for credit reports that you can use or go for the paid ones which give you extra information and support.
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Amanda Gillam is Solution Loans's General Manager and has been since 2009. She is also a prolific writer on personal finance issues, and has been quoted numerous times in articles published on 3rd party websites and in press releases. Her...Read more about Amanda Gillam
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