What Is A Credit Score And How Does It Work?  

A lender checks a credit score first when granting a loan. A healthy score helps you get good interest rates on everything from mortgages to simple credit cards.

The blog discusses – how a credit score works. It also analyses credit components and ways to improve credit scores. It will help individuals with no credit history to build strong credit scores.

What does a credit score imply?

A credit score is a 3-digit number provided by credit reference agencies in the UK. It reveals a borrower’s potential to afford the loan payments. Credit agencies collect data from direct lenders, public records, service providers, or landlords to learn more about this. It helps them know a definite number that defines a borrower’s affordability. A higher credit score helps one get instant loan approval at low interest rates and vice versa. Individuals with credit scores 961-999 have excellent or good credit scores. The range 561-721 qualifies as a bad credit score.

Can you have more than one credit score?

Yes. Different credit reference agencies provide different credit scores to people. Each credit reference agency analyses the information according to specific and unique standards.

Credit reference agency	Excellent	Very Good	Good	Poor	Very Poor
Experian	961-999	881-960	721-880	561-720	0-560
Equifax	811-1000	671-810	531-670	439-530	0-438
TransUnion	628-710	604-627	566-603	555-565	0-550

What is a credit score used for?

Lenders or lending companies use credit scores to calculate whether you can afford the facility. They utilise the credit score to provide personal loans, car loans, credit cards, instalment loans, etc. It also helps the lender decide the interest costs and total loan costs to pay on the loan.

Moreover, landlords and service providers also use credit scores to analyse past rent payments. It helps him analyse whether the tenant is reliable with the regular payments.

Which factors determine a credit score?

Credit reference agencies collect information from service providers, landlords and other parameters. Further, lenders analyse other aspects to calculate a credit score on the scale of good and bad. 

These components make a prominent part of your credit report. It is a financial document that records expense and debt management. It may include your payments regarding- utility bills, credit cards, mortgage payments, doorstep loans, instalment loans, etc.

Here are other important parameters of the credit report that decide your credit score. Additionally, these factors are the central part of your curiosity—How does a credit score work? Let’s analyse.

1) Type of bank account

A Personal or business account with the same debit card impacts the credit score.  Using a personal account for business-related expenses harms your credit score. Lenders consider it negatively, and it may directly affect the approval. Alternatively, having separate personal and business accounts helps the credit score.

2) Credit mix

Credit mix grants depth to your credit report and history. It involves a mix of good and bad debts. For example- credit cards, student loans, mortgages, doorstep loans, loans for the unemployed, etc., reveal a good credit mix.

A balanced credit history with a good mix impacts the credit score. Here, credit cards, overdrafts, short-term loans, and payday loans are bad debts. However, student loans, mortgages and personal loans improve credit history and are good debts.

3) Past behaviour with the lender

It also determines the credit score largely. Negative reviews or experiences with past lending may impact the credit score. If you missed payments without informing, did not respond to calls, etc., It hampers an individual credit and further approval chances.

4) Length of credit history

The average length of your credit accounts also determines your credit score. Managing credits and payments consistently on the same account for a long helps your credit score. Thus, never close any old credit cards that you don’t use. It may impact the credit history length and the credit score. A detailed and comprehensive history helps you win the lender’s reliability.

5) Credit utilisation

How an individual utilises the credit decides the credit score. If you rely on credit for short and medium-term needs, it works against you. Similarly, low and responsible credit payments determine discipline payments. It helps you keep credit utilisation low and grab affordable finance. It is advisable to keep it low to 30-40%.

How does a credit score work?

A credit score determines your ability to qualify for short—and medium-term loans and credit cards. Credit reference agencies calculate the score by considering income authenticity in addition to the above aspects. A higher credit score helps you get better rates and lower interest on mortgages, credit cards, 12-month loans, no-guarantor loans, etc.

It helps you save on interest and other loan costs compared to individuals with bad credit scores. The higher the credit score, the better the loan approval chances. Additionally, it grants one the power to negotiate the terms.

How do you increase your credit score for affordable borrowing?

Improving your credit score may help you get cheap credit cards, extend your limit, and increase home loan approval chances. Here are some steps to take to improve your credit score hassle-free:

1. Update information on the electoral roll

An electoral roll helps the lender confirm the citizenship of the borrower. Additionally, aspects like- residential address, name, and contact number create reliability. Individuals should update the information on the electoral roll if not checked it in a while. Mention current address and contact details.

2. Settle some debts

Repaying costly or high-interest debts like credit cards, doorstep loans, and unsecured loans helps you improve your credit score. For example, paying off credit card debt can boost your credit score by 10 points.

3. Make timely payments

Late payments stay on your credit report for at least 6 years. It impacts your credit score and your lifestyle goals drastically. So, ensure regular payments by setting a budget and paying through direct debit. Also, avoid taking unnecessary debts.

4. Use the eligibility checker before applying

It is the most important part of ensuring a good credit score. The eligibility checker helps you analyse loan costs, such as approximate repayments, interest, and total loan costs. It is helpful if you are applying for bad credit loans with a direct lender.

For example- You need cash to repair or replace seat covers with a low credit history. Here, an eligibility checker will help you borrow only an amount you can comfortably repay. It prevents your credit score from further damage.

Additionally, avoid making multiple loan applications after checking eligibility. It also impacts credit scores.

Bottom line

Credit scores are an essential part of financial management. Having a good credit history helps one fetch affordable interest rates and terms. It also grants power to negotiate on deposit and other loan aspects. Improving credit score is just the beginning. Monitoring it every month is important to maintain it. Eventually, understanding how your credit score works will help you make better financial decisions.