What's my credit score & why does it matter?
Credit scoring isn’t the most glamorous of topics, but if you want to get yourself into good shape financially and be in the best position to borrow big money from banks at a low-interest rate, it’s one of those things you really should start paying attention to.
Your credit score is a number which indicates how likely you are to pay money you borrow back on time. It’s pretty simple when you think about it - if you lend money to a friend or family member, you want to know that you’ll see that money again at some point in the future. Banks operate and make decisions in the same way.
Often people don’t understand why they have a poor credit score when they’ve never borrowed money on credit or as a loan, because they see themselves as responsible with money. Surely you’re great with money if you don’t ever borrow any money? Maybe, yes - but the bank doesn’t care about what you do in your spare time or how much money you have saved.
A bank is all about risk. When you borrow huge amounts of money, most often in the form of a mortgage, the bank is looking for reassurance that you know how to manage your money and repay debt, and the best way to assess that risk is to look at how you currently manage your borrowing. If you can use a credit card with a limit of £10,000 responsibly, the bank will feel more confident that you can borrow £200,000 and repay it on time.
There are three main credit agencies in the UK - Experian, Equifax and Transunion - each of which produces its own credit score for every individual, so it can be helpful to check your score across all of the agencies if you’re thinking about applying for a mortgage in the medium term. Improving your credit score isn’t an overnight job; there are a few things you can do to speed up the process, however, often it can take several months to make changes that will significantly improve your score.
And the main takeaway? As with most things financial, the sooner you start moving, the better. If you’re looking for more on how to improve your credit score, keep your eyes peeled for the next post.