It’s probably fairly self-evident that your credit score will impact your ability to borrow. What you may not have realised, however, is just how much it touches on your everyday life. For example, your credit score may influence your ability to get service contracts. This includes rental contracts. It can even influence your ability to get a job.
How credit scores are used
If you apply for any sort of credit from a commercial lender, you can probably take it as read that you will be given a credit check. This can mean anything from buy-now-pay-later accounts and credit cards to car loans and mortgages.
Likewise, if you apply for any sort of contract where you pay in arrears, there is also a strong likelihood that you will be given a credit check. This is because the provider is effectively giving you credit. The higher the risk to the lender, the more likely it is that they will credit-check you.
Some employers will also use credit checks. This is particularly common for jobs that have security implications. Having a good credit score indicates that you can manage your finances. This can be read as meaning that you are less likely to defraud your employer either voluntarily or because you feel forced to do so.
Soft checks versus hard checks
Soft checks are limited overviews of your credit score. They are used to get an idea of your general eligibility for credit. Hard checks are formal reviews of your credit score.
The reason why there are two types of checks is that having an excessive number of hard checks can reduce your credit score. Lenders will therefore often start with a soft check to see if there is a reasonable chance of you qualifying for their product. They will only go onto a hard check if they think it will be favourable.
How your credit score is calculated
The exact way your credit score is calculated is a secret known only to the credit reference agencies. In the UK, the main credit references are Experian and Equifax. These are followed by TransUnion and Crediva. There is, however, some general guidance on what factors they use to calculate your credit score.
Payment history
Payment history is a significant factor in calculating your credit score. This is why young adults (and new arrivals to the UK) can find themselves in a Catch-22 situation. They struggle to get credit because they have no payment history. They struggle to create a payment history because they can’t get credit.
Fortunately, there are credit-building products you can use e.g. credit cards for people with poor credit. These products can be expensive and limited. Even so, it can be worth using them just to start the process of building a credit score. Once the credit ball has started rolling, it should be easier to keep it moving.
Remember that what lenders want to see is all payments being made in full and on time. From a credit-scoring perspective, it’s much better to pay the minimum consistently than to overpay early in some months but underpay and/or pay late in others.
Use of credit
This is another huge factor in determining your credit score. Essentially the same comments apply here as to your credit history. It just applies to the present rather than the past.
Other factors
There are three other factors that influence your credit score. Individually, however, they are usually much less important. These are:
Length of credit history
Recent credit enquiries
Consistency
Consistency essentially means ensuring that all your financial details agree with each other. For example, if you live in Flat 1A, 2 High Street, make sure that you always record your details as Flat 1A rather than Flat A1.
Also, try to use the address where you’re registered to vote. If you’re not registered to vote, then consider registering. It can improve your credit score albeit only slightly.
