Finance

Understanding Your Credit Rating

A good credit rating demonstrating a positive financial history, acceptable money management skills, and low risk behavior is essential for anyone wishing to be approved for credit – including for a mortgage, a mobile phone contract, or a personal loan – and yet around 40 percent of the population don’t understand what a credit score is. Here’s some handy information, helping you to understand more about credit ratings, and their meaning, in the UK:

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What is a ‘Good’ Credit Rating?

One of the most important facts to take into account is that there’s no such thing as a universal credit rating; which means that there’s no magic number that automatically determines whether you’ve got a good or bad score. Each credit agency uses a different scoring scale, meaning that your score will vary considerably depending on which credit agency your prospective lender regularly deals with. There are numerous credit agencies in the UK, although most lenders tend to use one of the ‘big three’ – Experian, Equifax, and Callcredit.

* Experian

Experian uses a scale which sees most credit ratings fall somewhere between 600 and 750. With Experian, a ‘good’ credit score is anything above 700, with these people more likely to be approved for credit.

* Equifax

The scale that Equifax uses is quite similar to the Experian scale. Most credit ratings with Equifax fall between 300 and 850, with a ‘good’ score considered to be anything from 660, although the higher the score, the greater chance of approval.

* Callcredit

Callcredit’s rating scale is significantly different to the others. Callcredit use a rating scale of 1 to 5. 1 is the worst credit rating, with a rating of 3 considered average. The agency state that 4 is ‘healthy’, while 5 is ‘excellent’.

What Does a Credit Rating Mean?

Experts state that a credit rating is all about studying individual cases of ‘historical experience with debtors to derive a quantitative model for the segregation of acceptable and unacceptable credit applications’. What this means is that credit agencies use details they hold about you – such as your income and your past payment habits (including monthly debt repayments or any missed mortgage payments for example) to calculate the overall risk you pose to lenders. In a nutshell, your future behavior is estimated by your past financial actions.

With a good credit rating it’s much easier to secure a mortgage, bank loan, or mobile phone contract. However, remember that the score can rise and fall at any time based on financial behavior, and that not all credit agencies will hold the same information about you. While one agency may flag you as high risk, another may not, which is why approval all depends upon the agency that the individual lender uses.

Calculating Your Credit Score

UK residents have a legal right to access their credit rating through any credit agency, including the ‘big three’. However, assuming there are no instances of credit fraud, unfair defaults, or illegitimate applications on your account – anything that could affect your score unwittingly – you should be able to reasonably calculate your credit score using online tools that base their outcome on the same sorts of criteria that the major credit agencies use. This includes age, marital status, residential status, how many credit cards you own, and your annual income. This information should give you a good idea of whether you have a good or bad credit rating, and could indicate whether or not you are likely to be approved for credit with any future applications.

 

In addition to being a full time writer, Harry Price is a landscape artist who takes his inspiration from his coastal surroundings.

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