Do you know your credit score? Despite the fact that it’s one of the most important factors determining whether you’re able to borrow money in order to buy a car, take out a mortgage or even get a mobile phone contract, statistically speaking there’s a good chance that you don’t.
What is a credit score?
Credit scores help lenders decide whether to lend money, how much to lend and how much interest to charge. By not knowing their credit score, people risk paying more interest when they take out a loan and may face limits on the amount they can borrow. In extreme circumstances, they may find themselves “locked out” of credit.
Half of people in the UK have never checked their credit score, according to research from RateSetter, with 53% doing something which may actually harm their credit score – potentially making it difficult or impossible for them to borrow money in the future.
More than half of people who took part in the research (53%) are doing things which may harm their credit scores. For example:
- One in five (22%) have paid a bill late in the last five years.
- One in seven (15%) are not on the electoral register.
- One in ten people under 35 (10%) have moved house more than twice in the last two years
- One in fifty (2%) have a joint bank account with an ex-partner
Many other respondents were also doing things which may prevent them from building up a good credit history: for example, one in ten (11%) have never taken on any debt, which can result in what’s called a “thin file”, where underwriters do not have access to enough information to assess someone for creditworthiness due to a lack of borrowing history.
What can you do about it?
What does this all mean for ordinary borrowers? “Credit scoring is an imperfect science, but it is a really important part of the decision of whether to give someone a loan. By checking your credit score, which the likes of ClearScore, Equifax and Call Credit allow you to do for free, and taking a few easy steps such as getting on the electoral register, you can really improve your score and with it, your chances of borrowing more cheaply.”
“Some people think that by never getting into debt, they will automatically be seen as creditworthy. But in reality, it’s by borrowing and paying back on time that you can build up a good score.”
Happily, while In addition, three in ten people are worried about their creditworthiness and a similar number (32%) are intend to take action to improve their credit score within the next 12 months.
Additionally, if you want a quick overview of how to improve your score, RateSetter’s Jay Magee provided his seven deadly credit scoring sins to avoid:
- Not being on the electoral register
- Moving home too often
- Not paying bills on time
- Not building up any debt, ever
- Sharing a bank account with someone with poor credit history
- Having too much outstanding debt
- Remaining a “financial associate” of an old personal or business partner
While some of those are self-explanatory (it’s pretty clear why you should avoid paying bills late), others are more nuanced. For example, lenders like to see stability, which is why they tend to favour people who live at the same address for a long period of time. Your score can also fall if you become financially linked with someone who has a poor score – this typically happens by entering into a joint financial agreement with them, by getting a joint credit card for example, and you can reverse this by closing joint financial products.
Want to learn more? RateSetter has published a free guide designed to help people to improve their credit score.