We always get told that our credit score is important, but what exactly is it and why should we care about it?
What is a credit score?
Your credit score is essentially a number that indicates how well you have managed your finances.
Your credit score is used in all sorts of scenarios: when taking out loans, getting insurance and even when getting a mobile phone! The higher your credit score, the better you look to lenders and the more likely they are to offer credit.
Credit agencies use slightly different levels for scoring so your number may be different between them, but the actual rating will be fairly consistent. For example, with Experian a credit score of over 880 is thought to be very good, and will result in lower interest rates than someone with a low score. Your credit score can also impact the amount of deposit required for purchases or rent and your credit limit on a credit card.
How is a credit score calculated?
There are five main factors that credit reporting agencies take into account when calculating credit scores. Payment history, the total amount owed, the length of credit history, the different types of credit and any new credit taken out. Payment history and the total amount owed carry the most weight and show whether a person pays on time and the total amount of credit that they are currently using. Longer credit histories are also considered less risky, which is why it is important to use credit (wisely) to help build up your score.
So why should you find out your credit score and keep an eye on it?
To make the most of your money
Finding out your credit score is a good way to get an insight into your finances and assess your own ability to manage your money! Plus, your credit score is taken into account all the time, from getting a new mobile phone contract to renting a house. Your credit score can impact all of these things by making it more difficult to get a good deal, so it’s important to know a bit more about it.
Companies and businesses may also check your credit score when you are applying for a job or looking to do business with someone new. They could use it to determine how responsible you are with your finances. If your score is too low you may actually miss out on employment opportunities!
So that you can take out a loan
Borrowing money and taking out loans is a part of everyday life for pretty much everyone these days. Whether you’re taking out a short term personal loan or you’re getting your first mortgage, the majority of us will need to borrow large sums of money at some point in our lives. To be able to take out these loans you need to have a credit score, and the better it is, the less interest you will get charged on your repayments.
To improve your credit score if you need to!
People with credit scores lower than 640 (this number will vary between agencies) tend to be considered as subprime borrowers who are less likely to repay their loans on time. Often, banks will then charge higher interest rates, for example on subprime mortgages, to compensate for the higher risk they are taking by lending to these people. Getting lower interest rates on your mortgage, loans, or other lines of credit should mean you ultimately pay less. Therefore, improving your credit score and demonstrating that you can manage your money can have big impacts on your life and finances. You might need to make some lifestyle changes and adjust your money management, but it is definitely possible to upgrade your credit score over time.
To learn more and how to find out how to improve your score, join our upcoming masterclass with Olamide Majekodunmi on how to harness the power of credit.