What is a credit score?
A credit score is a numerical value made up from your credit history. Your score shows lenders how trustworthy you have proven to be in the past at repaying debts and indicates which loans and interest rates you may be eligible for. Each time you apply for a loan, credit card, mortgage or other financial product, the credit provider will check your score to make an informed lending decision.
What is a good credit score?
All credit scores rank from excellent to bad, however, different lenders have their own standards and there is no universal scoring system for organisations to go by.
A widely used credit scoring system is the one provided by Experian. This system defines excellent to bad credit scores as the following:
Excellent – 961-999
Good – 881-960
Fair – 721-880
Poor – 561-720
Bad – 0-560
Although these figures give a representation of what is considered a good credit score, many lenders will have their own definitions. Generally, if you have a higher credit score (approximately 750 and above, based on the above system) you will be seen as a lower risk and are therefore more likely to have finance applications approved than those whose scores are lower.
What does my credit score mean?
Even if you’ve found your credit score varies with different credit agencies, it’s likely that the category you fall into will be similar. The information below shows which characteristics relate to each credit category:
|Long and demonstrable residential and employment history.||Long and demonstrable residential and employment history.||Frequent residential changes with on and off electoral roll records.||Unstable address history, recent employment and/or periods of unemployment.||Unstable address history, recent employment and/or periods of unemployment.|
|Lengthy credit history with mortgages, loans/credit cards with no missed payments, CCJs, or defaults.||Lengthy credit history with mortgages, loans/credit cards with few missed payments, CCJs, or defaults.||Recent employment changes with more frequent credit applications.||Over credit limits and late with mortgages and loan repayments.||Over credit limits and late with mortgages and loan repayments.|
|Infrequent credit applications.||Infrequent credit applications.||High debt: income ratio, with occasional missed credit payments or limits exceeded on credit cards.||Recent/current late payments and defaults.||Recent/current late payments and defaults.|
|Full electoral roll record.||Old defaults or CCJs.||Recent CCJ.||Recent CCJ.|
|Discharged from bankruptcy.|
If you haven’t checked your credit score yet, this table should give you an idea of which category you fall into. However, this is only an indication and the best way to find out your credit score is to check it yourself, especially if you think you have a poor credit history. Knowing your credit score will help you better understand what interest rates you will be applicable for.
What if I have bad credit?
If you know you have a bad credit score then you have more options than you might think. Some things you should consider if you are in this position include:
Avoid making multiple applications at once
It might be tempting to make lots of credit applications to see who will accept you, but the best thing to do is apply and wait. Every application will leave a mark on your credit file whether you are rejected or not. Lenders won’t be able to see the outcome of previous applications on your credit file. But if they see several applications within the same time frame they might consider this a desperate need for funds. This means you might be considered to be a potentially risky customer and they might question your ability to repay the loan.
If you have a bad credit history and need a loan, the best thing to do is check the application criteria beforehand. If a lender does refuse your application you should wait a few months before applying with a different provider.
If you are struggling to get loan approval due to your poor credit history then you might want to consider applying for a loan with a subprime lender or broker (such as Red Potato). These providers specialise in helping people borrow money who don’t qualify for prime rate loans and may have been refused finance elsewhere.
Most subprime lending companies look at your monthly income and expenditure and base a lending decision and interest rate on your current affordability.
As you might expect, interest rates for subprime loans are typically higher than loans from prime rate lenders. This is to compensate for the risks associated with lending to someone who has previously struggled to manage their finances.
Improve your credit score
Just because your credit score is bad now doesn’t mean it has to stay this way. Improving your credit score will help to increase your lending options for the future, allowing you to take advantage of better rates and deals.
There are several things you can do to improve your credit rating and increase your chances at getting loan approval. We have put together a useful guide of things you can do to help improve your credit score.