A Beginner’s Guide to Credit Scores

29th July 2016 by Vincent Wong

I read an article in last Sunday’s The Sunday Times about credit score errors being on the rise. For those of you who are unfamiliar with credit scoring, particularly if you want to start to investing, here is an easy-to-remember (by using the acronym C.R.E.D.I.T.) summary on to how to get started, with a view to minimising problems later on:-

 

C               Credit Score Agency: There are a number of agencies that offer credit-scoring services. Most financial companies, when you approach them for a loan (be it a mortgage, car financing or any other loan), for example, will work with Experian. If you register for free at checkmyfile.com you can see an overview of your financial history through all providers and be aware of anything that requires attention (but be aware that any credit score agency will start charging you after a month).

 

R               Repayments on Credit Cards: If you default on credit card payments, this will show up on your credit score. Particularly if you usually pay a minimum amount each month and default for one month or more. You can usually sort out any errors (of your own doing or at the fault of the lender) directly with the credit company. It may take time and effort but it is YOUR financial history.

 

E                Electoral Register: If you don’t feature on the UK Electoral Register, this can impact negatively upon your credit score. It’s best to communicate any reasons for not being registered directly to the credit score agency, e.g. if you have worked overseas for an extended period. You can update your file at any time once you have registered an account.

 

D               Debt: If you have any bad debt, this will show up on your credit score and it may mean that you are limited on access to credit or funding. In today’s ever-competitive marketplace, lending to those with bad debt is in high demand. But I would err on the side of caution if you are already in debt. If in doubt, seek professional advice.

 

I                 Information: Keep your profile up-to-date with current information, especially if you have challenged or questioned elements that feature within your credit score. Sometimes, lenders make mistakes too so be vigilant and take ownership of your own financial status.

 

T                Timing: Take into account that certain information on your credit score only remains on your file for a certain amount of time. By way of example, if you want to apply for a new credit card and know that you defaulted on one payment way back when, check with the Credit Score company to find out when this “mark” against you will come off your account.

 

The most important thing to remember about a credit score is that whilst it is not the be-all and end-all of your financial history, it can open or shut doors to you if you are trying to get a mortgage or credit card. For those interested in achieving financial independence it is crucial that you understand how a credit score is structured at the very least, with a view to taking control of your financial future in the medium to longer term.

 

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