We've all heard that money talks, but what would your money say about you? For Talk Money Week, Renika Klair looks at credit scores, how they work and how you can ensure that yours always says the right things about you and your personal finances.
What is a ‘credit score’?
A credit score is a number between 300 and 850 that indicates creditworthiness to lenders. This means your credit score is one of the most important factors when it comes to your money ‘reputation’.
When a company considers lending money to you, your existing credit score will give them an indication of:
- how much they should lend you
- how much interest to charge you, and
- whether they should lend to you in the first place.
To avoid being categorised as a credit ‘risk’, you want your credit score to be as high as possible. This will also help you get a better interest rate on any borrowing.
Your score is determined by your previous credit history, including your:
- repayment history
- level of debt and
- the types of loans you’ve taken out previously.
A number of factors can cause your credit score to drop, such as missing payments, maxing out on your credit card or being right up to your overdraft limit.
But there are also several simple but effective things that you can do to keep your credit score healthy.
Seven tips on how to maintain a healthy credit score
- Stay at one address for a good length of time. When lenders see that someone has moved around a lot, it makes them more nervous about lending.
- Make sure you’re registered to vote at your current address, even if you live with your parents or are sharing accommodation. Lenders and companies will check the electoral register to make sure you've given them correct information about who you are and where you live.
- Similarly – even if you live with your parents or are sharing with friends – put at least one household bill in your name. Your payment history will have the biggest influence in how your credit is scored, so you must pay bills on time.
- Pay off any debt before you apply for more credit. You may have to do this over time, but once you’ve paid off your debt, you’ll have a better chance of getting credit.
- Check if you’re linked through a joint account to another person – eg spouse or family member – who has a low credit score. Their poor credit score will affect yours.
- Check your credit file for any mistakes or fraudulent activity. It's free to request your credit reference file and you can find out how on the Information Commissioner's Office website.
- Use your credit card wisely. Credit cards can help spread the cost of hefty purchases but don’t spend more than you can afford. Set up a direct debit to cover your monthly bill to ensure it's always paid on time. This will help you avoid interest and excess charges, as well as build your credit score.
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