Life Skills: Finance - Credit scores

Credit Scores are confusing, aren't they? Most of us are terrified of seeing our credit score and with good reason, it's tough to live in today's world and a credit score often doesn't reflect the reality.

But why are they so important? Well, the short answer is they are how lenders see how likely you are to pay back a formal loan or credit. So that time you borrowed a tenner off someone will not be reflected in your credit score!

But it's not all doom and gloom, a good credit score can be life-changing when you need it as it affects a lot of areas of your life that you might not realise such as your credit file being approved to rent a home through a private landlord, buying a car on finance or phone contracts. 

Your credit score can even affect whether or not you are successful in a job application for a job role that is classed as 'high end'. Jobs like these will often carry out credit checks as part of the application process, so if your credit rating is poor at the moment and you plan on going through university into a high-end job it may be worth thinking about your credit score now.

How is your credit score calculated?

Your credit score is calculated using 5 factors:

• Payment history - this is pretty self-explanatory but in essence, this is how often you have paid your bills on time. This is also the biggest factor in your credit score making up 35% of your score.
• Utilisation - this is how much of your overall credit you use. Ideally, you never want to be using over 50% of your maximum credit allowance.
• Length of credit history - this refers to all the credit accounts you have had over your life or 5 years.  This one might seem strange but having a credit account open with the same companies for a long period is not only factored in, but in some cases can help boost your credit score and having multiple accounts with multiple companies can also be a slight bonus as long as you have opened them all over a long period.
• Recent activity - this will look at how much credit you have received or applied for over the last 3-6 months, it will also take into account if you are trying to pay off your credit or just gaining more.
• Overall capacity - this will factor in all of the debt you have still to pay off.

Now you know how your credit score is calculated but how do you find out your credit score? There's a variety of apps that allow you to check your credit score. ClearScore and Experian are popular examples, these not only tell you what your current credit score is but also how to boost your score and find offers for you.

What can I do if I have a poor credit rating?

As a student, many are just in the early stages of having a credit score which is sometimes worse than having a bad credit score, because lenders do not know if we would pay it back or not, but fear not there are loads of ways to build your credit score. 

First off it is important to remember that in general, credit history is built up slowly over time as you increase the number of on-time payments you make. Also remember that the longer a bill goes unpaid, the more likely it is to affect your credit score. Keep a close eye on your credit score to help you spot issues like fraud or errors in addresses on your credit file. Most negative marks will remain on your file for at least six years. After that, everything is deleted from your file. This includes missed payments, defaults, and bankruptcy. However, there are some improvements that you can make to begin improving your credit score. These will take around 12 months to fully impact your credit file. Below is a video of Martin Lewis going over ways to improve your credit score and we have expanded on points he made in the video below.

A bit more on some points from the video

• First off if you have any direct debits pay them on time, as this is one of the 5 factors that affect your credit score. If you struggle to do this, set up a monthly budget and see if there is anything you can cut back on, once you know how much is due to be paid out change the date to a couple of days after you're due to be paid for them to come out. Check out our page on budgeting here
• Consider a credit builder card. Most credit score apps will offer you a credit builder card and these are credit cards that people with a poor credit rating can get that have a very low limit on the amount of credit you can take out, but they do have a high-interest rate. So while these are good for building your credit score, you must make sure you always pay the minimum and clear the balance as soon as possible. If you are in between stable incomes we do not recommend taking out this type of credit card as it could potentially do more harm than good to your credit file, however, if you are on a stable income that does not fluctuate dramatically and live within your means while looking to try to get a quick boost to your credit rating this could be a viable option. The recommended way of using this is, in a month to spend £50-£100 on this card a month then pay it off in the same month to avoid the interest charge.
• Make sure you are on the electoral register and it is the same address for all of your direct debits even if you don't vote. This is proof of who you are and makes a big impact on credit applications. If your addresses don't match up you can be refused credit on that alone. So when you move address make sure you notify all your lenders and update your details with them even if they are chasing you for an unpaid debt. If you are worried about receiving spam you can always opt-out of the electoral marketing but still be on the register.
• If you are applying for new credit accounts make sure you spread them out, prioritise what you need first. For example, if you are wanting to take out a credit card and a new phone contract chose one of them for the time been and apply for the other in 6 months, this will help support the recent activity on your credit report.
• Keep the same bank account for as long as possible. We have all seen banks have offers for switching your account to them, but this isn't good for your credit score and in fact, it is seen as being unstable so if you are planning to apply for a credit application like a mortgage or credit cards the last thing you want to do is to switch your bank account in the months leading up to your the application. If you are wanting to switch bank we recommend thinking about why you want to switch banks and what do you want to get from your new bank? There are a lot of extras that can be taken advantage of, not to mention that different banks provide different interest rates, so once you've decided on what you want then you could start comparing different banks and what they offer. We have more information on that here
• Have a savings account with your bank that you put money into regularly, this shows the bank that you can keep extra money aside and is very encouraging for them to lend to you in the future.

Tips on managing your credit scores

• Joint credit files - you may be in a long-term relationship or even married, but you should always make sure that the person you plan on building a joint credit file with is good at money management as their credit scores can affect yours in-advertently.
• Make sure your accounts have all the correct contact details for yourself especially your current home address.
• Keep your account information private to avoid fraud, and dispose of any old documentation that has credit information on it by shredding or tearing the document up to as many pieces as possible. This may sound obvious but chances are you know someone who has had fraud committed in their name because someone was able to use old information to create a new account in your name.
• If you are considering becoming a guarantor for someone make sure you trust they will make repayments because if they do not pay, the bill will legally be your responsibility and failure to make payments will affect your credit rating as if it was your account. 
• As stated above some jobs do require credit checks to be successful so keeping onto of your credit score to the best of your ability is key.

References

Money-Saving Expert

Credit Club - Heres a free credit score tracker by money-saving expert with built-in insights to help boost your credit score
Credit card builders.
Student centre with loads of useful info for students

What is a credit score Money Advice Services

Credit builders Which

Financial Services:

Money Advice Service

National Debtline

Citizens Advice Service

StepChange Debt Charity