How Do Credit Scores Work?

We all have a financial fingerprint, a trail of transactions and purchases, and evidence of our ability to pay back debt, that follows us around our entire lives. You may not think about it much, but your credit file is incredibly important in how you can live your life over a long period of time. If you are ever in a position where you wish to take out a mortgage and purchase your own home, buy a car, take out a credit card, or a large personal loan, it is your credit score that will be checked by the lender to ensure they are satisfied that you demonstrate the correct qualities to pay back the debt on time and within the agreed parameters.

How do credit scores work though?

Your credit file is held by different credit agencies – TransUnion, Experian, and Equifax – each with different scoring methods. Your file will include information and data that has been collected about you over your life, and will look at various sources of financial data, including your bank, other credit lenders, utility bills, and generally how you manage your finances. A credit score is then created based on this information, and is used as a way for potential new lenders to see whether you are an attractive proposition who is likely to pay back debt or not.

You can regularly check your credit file for free, and it is important to do so in order to ensure that all information held within it is accurate (inaccuracies can have a damaging impact on your ability to acquire credit in the future). Ensure that you are registered on the electoral register at your current address, and that the address listed for you is correct, as both of these things have an impact.

Remember, whenever you take any form of credit out it is important to keep up with payments, even if it is just a minimum monthly amount of payments. Consistency is key, as if there is a drop off in payments at any point this will damage your credit score. Good habits and regular repayments help to build a solid score over time, even if you have multiple lines of credit open at any given time. It is all about demonstrating that you can manage finances even under the toughest of circumstances.

One thing to say, is that there are avenues open to you to acquire credit even if you do have a poor credit score. There are companies that can provide you with an adverse credit mortgage (but be prepared to pay much higher deposits and have higher interest rates), whilst some responsible payday loan lenders will look at your current and projected future behaviour in terms of your current employment and income and make a decision on a short-term loan application based on this, even if in the past your financial management has led to a poor credit score. Managing your debt and financial life to ensure you have a good credit score is an on-going process and one that is eminently achievable for everyone with good practice and getting into positive habits.