What is a credit score and where do I rank? Read on to see the answers…
Learning about what a credit score is has only been a recent thing for me, and it turns out there is rather a lot to it! In this blog I am going to assume nothing and address:
1) What a credit score is,
2) Why a good credit score is important and
3) Where to find the darn thing!
Unless you are incredibly cash rich – i.e. you do not need to apply for any loans or mortgages because you can pay for most things with money outright – you will at some point in your life (most likely several times) have to apply for a loan of some sort.
[I covered debt and loans in my what is the difference between good and bad debt blog post so click on this link if you want to refresh your memory]
Before the lender/bank hands over any money to you they will first search for your individual credit file and if you are applying as a couple then they will look at both your credit files.
Credit file, you say? What is a credit file?! Do not worry, before February 2020 I did not know I even had one!
A credit file is a log of all your personal identity details, previous addresses, previous employers and also your bank and credit history. The lender will then use this as part of their analysis to do a credit check on you to assess whether you are a reliable client to loan money to or not.
To make it less subjective and allow comparisons to be made against other people in Great Britain – the credit score was created.
What is a credit score?
A credit score is effectively a scale of how reliable you are to lend to.
Credit score UK will rank you against the general population and you will find that the higher your score, the higher the chance that a bank will lend to you. It is multifactorial and takes into consideration your financial stability and how likely you are able to pay them back, because at the end of the day it is the lender’s money so they will want to ensure they do not lose it.
Here is an example…
You are friends with colleague A and colleague B and they both ask you for £50 because they are short and promise to give it back to you next week.
(For the purpose of this we shall ignore interest rates, I just want you to understand how a bank judges you on your creditworthiness)
You have given colleague A £10 in the past and never got it back, as you know them to be quite impulsive with their spending and they go into their overdraft regularly because they have got carried away with yet again the release of another new xbox game.
You have also lent £10 to colleague B last month and they are very good at handling their money, they are frugal at times when necessary and are financially more sensible and cautious. They stayed true to their word and repaid you back your £10 as promised.
Now. If you compare the (credit) “history” with colleague A compared to colleague B – who are you more likely to lend your sacred £50 to? I know which one I would choose.
From this very, very simple example you could say that colleague B will have a higher credit score so you would be more inclined to lend to them, satisfied that they would stick to their terms and pay you back. No one likes to lose money and banks are certainly no exception!
How do I find my credit score?
Most people will have heard of Experian (if you haven’t – don’t panic – that was me too not long ago!) that you can create an account with and they will then give you a FREE credit score: Yippee! Sorted!……..not quite.
Experian is only 1 of 4 credit agencies, the others being:
Why are there four credit agencies?
Different banks will refer to different credit agencies before giving you a loan.
Each credit agency, inconveniently, will hold a slight variant of your credit file and yes, you guessed it, you will not know which one.
How does this affect you? Stay tuned for the next blog post, as I want to try and keep my blogs concise and insightful to avoid information overload…and boredom!
My next post will be on: how to boost your credit score. Please subscribe to my mailing list to get an email every time a new post of mine is released.
Before you go here is my health tip or fun fact that I like to end on with each of my blog posts so I can feel more “doctorly” and do my part in encouraging the nation to stay healthy – here it is:
Having ‘5 a day’ is an arbitrary number that the Government made up to make the nationwide health initiative more catchy – it should be at least 8 !!!
“An apple (or eight !!!) a day will keep the doctor away”…or so the adage goes.
One last thing – I promise – please remember that this is just my opinion and is not financial advice.
Until next time!