Credit Score

What You Need to Know About Your Credit Score

Have you ever applied for a loan only to be unexpectedly turned down? Perhaps you were looking to take a mortgage out on a property and were informed that it was denied. In more cases than not, these unfortunate situations are the result of a rather poor credit score. Credit scores can either help or hinder us; all depending upon their ratings. Still, many are unaware at just how critical these values are. If you are burdened with a poor score, your financial health and freedom may very well be affected for years into the future. What variables are used to calculate this score, what are some tips to improve its value and what major reporting agencies are involved in calculating your financial worthiness?

Your Credit Score: What is Taken Into Account?

It is a myth to believe that your score is solely based upon an ability to repay outstanding loans (such as a student loan). On the contrary, many agencies will take a number of factors into account. These are generally:

  • The amount that is currently owed in the form of debt
  • How many years you have held credit for
  • Any new credit that you may have received
  • Your overall payment history

The first factor should be altogether obvious. Those with higher amounts of debts are thought to be credit risks. Therefore, lenders are much less likely to enter into any type of formal agreement with the borrower.

The same holds true for those who may have only recently obtained credit (such as in the form of a credit card). Less experience once again equates to higher levels of risk. They will therefore be rated lower by the authorities. The way to improve this is to build a solid history over time.

New credit can pose a threat that the borrower will not be able to repay the amount owed. However, this is only a small percentage of the total perception of the client.

Finally, one's payment history is taken into account. Late or partial payments are not as bad as missing a payment entirely, but both will reflect negatively upon the overall credit report. It should be obvious that any defaults in terms of loans will severely damage one's score.

Ratings and Agencies

The score is generally based around the provider in question. For instance, there is no “good” score. Depending upon the firm that is rating, the scores will differ. Let's take a look at some of the top credit rating agencies in the United Kingdom. These are:

  • Equifax
  • Experian

Equifax rates “poor” as a score that is at or below 278 points. “Average” falls between 400 and 460. “Good” is from 466 to 500. “Excellent” is any score above 500 points.

On the contrary, Equifax rates “very poor” as a rating between 0 and 560. “Fair” falls between 721 and 800. “Excellent” is considered to by any score between 961 and 999.

We can clearly see that the best way to appreciate your score is to obtain a reading from both firms. You can then see if there is any room for improvement.

Ways to Improve Your Credit Score

If you have poor credit, all is not lost. Let's not forget that these financial figures are never set in stone. In the most severe of cases, it could be wise to seek the help of a debt consolidation firm. They will be able to combine your payments into one lump sum and the chances are high that a portion of the debt will even be removed entirely. Some other methods include:

  • Pay all of your bills on time.
  • Place a limit on your monthly credit card expenditures.
  • Avoid taking out any unnecessary loans.
  • Make sure to check your balance on a regular basis.

By following these tips, you will soon find yourself on the road to recovery!