A credit score ⚖️ is a numerical representation of an individual's credit 'worthiness', often used by lenders/banks/credit card providers 🧐 to assess the risks associated with lending you the money.
A higher credit score🦸♀️ generally indicates a lower risk of default (not paying the money back), i.e. it is likely you WILL pay the money back 🥳. Therefore making lenders keen to give out the loan to the high credit scorer. High credit scorer tend to have a much easier time obtaining loans💰, credit cards 💳, mortgages 🏠, car finance 🚗 and other forms of credit at favourable terms.
(Favourable terms = lower interest, lower fees, longer loan period etc)
Conversely, a lower credit score 👾 can limit access to credit or result in higher interest rates 💯, as these financial institutions feel it's too risky to loan you the money. If you don't look after your credit score, you may not be successful when applying for a mortgage or even a credit card.
As I included in my previous blog post, I demonstrated how a misuse of credit card with poor credit limit management could result in rejections for future loan/credit card applications! Even if you are successful with your application, they might lend you the money but with a very high interest rate due to their estimated calculated ⚖️ risk.
How is your credit score calculated?
In the UK 🇬🇧, credit scores are calculated based on several factors. While the exact algorithms are unique to each lender, common factors include:
1. **Payment History**: Whether you pay your bills on time.
2. **Credit Utilisation✨**: The ratio of your current outstanding credit card balance/loan to your credit limits. I did a full break down couple of blog posts ago. Go to this 👇 blog post to learn credit utilisation
https://www.moneyfirstaider.com/post/credit-stress-test-knowing-your-limits
3. **Length of Credit History🕑**: How long your credit accounts have been active.
4. **Types of Credit/loan**: A mix of credit accounts, such as credit cards, mortgages, and personal loans.
5. **Recent Credit Applications 📜**: Number of recent inquiries or applications for new credit.
6. **Public Records 👮♀️**: Information like bankruptcies, IVAs (individual legal agreements), or CCJs (court orders).
7. **Debt Levels**: Total amount of debt you owe.
8. **Electoral Roll Registration☑️**: Being registered to vote at your current address.
These factors are combined differently by various credit reference agencies, such as Experian, Equifax, and TransUnion.
How a Bad Credit Score Can Affect You in the UK
A bad 👎 credit score can significantly impact your life in the UK, limiting your financial options and potentially causing stress. Here are some of the main ways it can affect you:
Difficulty Obtaining Credit
* Loans: You may struggle to get personal loans, mortgages, or car loans, even if you can afford the repayments.
* Credit Cards 💳: Obtaining a credit card might be challenging or come with high interest rates.
* Overdrafts: Your bank may be reluctant to offer an overdraft or limit the amount you can borrow.
Higher Interest Rates
* Loans 🏧: If you do manage to secure a loan, you'll likely face higher interest rates, increasing the cost of borrowing.
* Credit Cards 💳: Your credit card interest rate could be significantly higher than those offered to individuals with good credit.
Limited Housing Options
* Mortgages 🏘: A bad credit score can make it difficult to get a mortgage, restricting your housing choices.
* Rentals🏠: Landlords may be more hesitant to rent to you, especially if you have a history of missed payments.
Difficulty Getting Utilities
* Gas 🔥 and Electricity⚡️: Some utility companies may require a deposit or refuse to offer services to individuals with poor credit; such as the gas and electric home cover packages.
* Mobile Phones🤳: You might find it challenging to get a new mobile phone contract without a deposit or upfront payment.
Impact on Insurance Premiums
* Car Insurance 🚘: Your car insurance premiums could be higher due to the perceived risk associated with a bad credit score.
* Home Insurance 🏡: In some cases, home insurance premiums may also be affected by your credit history.
Job Opportunities
* Employment 👷♂️: While not a direct factor, a bad credit score might indirectly affect your job prospects if potential employers conduct credit checks as part of their hiring process.
Remember, improving your credit score takes time, discipline and calculations, but I would argue that it IS a worthwhile investment in your financial future.
Living in UK 🇬🇧, it is difficult to live an adult life without involving SOME form of credit/loan. If you know you are about to apply for some form of loan for phone, car, home, high value purchases, start working on your credit score by perfecting the aspects above!
My credit score is very high simply just by minimising my borrowing, paying up on-time and playing it right with my credit utilisation ratios of my credit cards, the rest will sort itself out. 🤗
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