What is a Credit Score?
A credit score is a number that shows you how likely it is that you are accepted for credit. Usually shown as a three-digit number, this score is based on your credit report, a detailed record of how you have taken care of your credit in the past.
Credit scores are produced by credit reference agencies to assist lenders in making informed decisions and limit potential risks associated with lending money.
What is credit?
Credit is an agreement between you and a lender that any money you borrow, you will pay back at a later date.
There are many types of credit including
All these are a type of credit, although it can sometimes be difficult to see these things in that way.
What does having a High Credit score Mean?
A high credit score means that you are seen as low-risk, based on the information in your credit report. For example, if your credit score shows that your bills are always paid on time, it demonstrates to lenders that you are a trustworthy individual.
It is worth noting that lenders are looking for someone who can meet their repayments. If your credit report reflects this, they are more likely to view you as a low-risk customer. Moreso, with a high credit score, your application for credit is much more likely to be accepted. You may even be offered cheaper interest rates.
Simply put, a high credit score means less risk to lenders.
What does it mean if you have a Low Credit Score?
If your credit score is low, it could mean that you are seen as a high-risk applicant. An example of what this may look like on your credit report could be that in the past you:
This information in your report when viewed by a lender can show it is riskier to let you borrow from them.
The consequence of having a low credit score and being seen as high risk can mean that if you are accepted for credit, you may be offered higher rates of interest. You could even have your application rejected. You can, however, improve your score for better results in the future.
Where is your Credit Score calculated?
Your credit score is calculated by one of three UK credit reference agencies (CRA). These agencies are called Experian, Equifax and Call Credit (now known as TransUnion).
When you send an application to a lender, they send each CRA information about your credit history and how you have managed it. They may send further information such as public records like the electoral roll, CCJs and bankruptcies to help form the report.
Here you may include all the pieces if information CRA use to calculate a credit score like
When enough information is gathered, the CRAs will generate your credit report and determine your credit score.
How is your Credit Score calculated?
Your credit score is calculated when a credit reference agency analyses the information it has gathered in your report and assessed your level of risk as a whole. This can mean that individual pieces of information, may not have a direct impact on your overall score.
An example of this in practice is if, on your record, it is noted that you have missed a payment but have a good overall history. This is much less likely to have an impact than if you missed a payment and have managed your debt poorly in the past.
Additionally, different aspects of your report will have different impacts on your score. This largely depends on how a lender views those factors along with the other pieces of information in your report.
To illustrate, if you have defaulted on a debt in the past, a lender is more likely to view this in a serious way than simply missing a few payments. This is because they may see you as less trustworthy.
Is it hard to get a Credit Score with no Credit History?
It can at times be more difficult to obtain a credit score if you do not have a credit history. If you have borrowed very little or nothing at all in the past, it is hard for lenders to see if your risk level is high or low and if you are trustworthy enough.
By default, lenders may assume that you are a high-risk applicant. This can mean they offer you higher rates of interest for your credit or even decline your application.
While understanding what a credit score is can be difficult to digest, it is worth noting that it is all about deciding how likely you are to pay back credit, based on how you have managed it in the past.
The key takeaways to remember are
Your score is calculated by credit reference agencies: Experian, Equifax and Call Credit (TransUnion)
A high credit score means you are less risky to lend to
A low credit score indicates you are high risk and less trustworthy
Your credit history and other information determines your level of risk as a whole
Little or no credit history makes it more difficult to obtain a credit score