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Understanding your Credit Score

A credit score is a number lenders use to help them decide how likely it is that they will be repaid on time if they give a person a loan or a credit card. Your personal credit score is built on your credit history which is collected from banks, credit card companies and other sources. In the UK, your FICO (Fair Isaac Corporation Score) ranges from 300 to 850. A good credit score is essential for your financial well-being because the higher it is, the less of a credit risk you are. So, a high score — usually above 650, will be positive news if you’re hoping to get a new credit card, apply for a loan, or even a mortgage. Whatever you need credit for, making sure your score is high means you’re more likely to be accepted and also to be offered better interest rates.

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The elements from your credit report that shape your credit scores are called credit score factors. Some factors that may affect credit scores are:

  • Your total debt
  • Types of bank accounts
  • Number of late payments
  • Age of your bank accounts

These factors are the different elements of your credit history that affect your credit score at the time it was calculated. They also tell you what you must address in order to improve your credit history in order to increase your creditworthiness. Monitoring your credit score on a regular basis and the factors affecting it, is the first step toward improving your score.

Top tips to achieving a good credit score (in the UK)

  • Register on the electoral roll at your current address. This helps companies confirm your identity.
  • Build up your credit history. If you have little or no credit history it can be difficult for companies to score you, which can result in a lower credit score.
  • Pay your accounts on time and in full each month. This shows lenders you’re a safe bet and can handle credit responsibly.
  • Keep your credit utilisation low. This is the percentage of your credit limit you actually use. For example, if you have a limit of £3000 and you’ve used £1500 of it, your credit utilisation is 50%. A lower utilisation percentage is usually seen in a positive light and should help your score go up.

Once you’ve got your credit score to the level you want it to be, here are some tips on how to keep a healthy credit score:

  • Limit the number of credit applications you make. Making too many applications in a short space of time can make lenders view you as overly reliant on credit, and thus a higher risk. Each application you make will record a hard search on your credit report.
  • Close any unused bank accounts. If the amount of credit available to you is too high, lenders may think you won’t be able to handle any more.
  • Keep up with your payments. Delinquent and defaulted accounts will harm your credit score.
  • Only borrow what you know you can afford.
  • Keep an eye out for fraudsters who can steal and use your identity to obtain credit. Their activity could hurt your score badly. So, check your credit report for any suspicious activity that you do not recognise.

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Here are a few credit agencies that you can use to check and monitor your credit score online:

www.experian.co.uk

www.equifax.co.uk

www.clearscore.com

www.creditkarma.co.uk

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Wealth8 is a digital wealth and investment service designed to democratize access to wealth opportunities for black and ethnic communities.

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