I may have been the only personal finance blogger who had absolutely no idea what is her credit score.
And why should I?
I have never been refused credit. (Okay, I was refused a zero percent credit card when we were just starting to pay off our debt but then I had no job applying for one given the amount of debt we had anyway.)
Lenders compete for my custom and bombard me with letters, phone calls and juicy offers.
So, you see, there was absolutely no reason for me to check my credit score – it wasn’t a problem so I left it just be.
Credit scores were something other people worry about; for me they were mildly intellectually interesting.
Until, I started writing something that made me look into the matter. I checked my credit score and on Experian.com it is…
…a perfect 999.
This is probably the highest credit score one could get! No wonder these credit offers keep streaming into my house.
Than something caught my attention.
It is all good and proper that I have this high credit score but most of my credit cards didn’t appear on the credit report. Which made me curious to learn more about the credit score game and all that goes with it.
This is what I found and it’s essential that you know about it as well.
What is a ‘credit score’?
Your credit score is a number calculated using variety of sources of information. I couldn’t find the exact formula – and different credit companies and landers use different algorithms – but –t is mostly based on your credit report (your credit history), confirmation of your identity, all information that you may find on credit applications like your income, debt level, reasons for borrowing etc. and information about your past relationship with the lander.
Your credit score tells lenders how much of a risk you are if they lend you money.
I’m not sure what came first – the credit report and score companies like Experian and Equifax and many others – or the erosion of personal relationships in banking and finance.
I still feel nostalgic about the personal service we used to get by our bank. Going to see our bank manager was the second thing John and I did after we got married (I hope you are not going to ask what was the first one because I’ll have to tell you that we went to walk the dog).
John told him about our plans, he looked at me and said: ‘It all depends on whether you are an asset or a liability.’
It turned out that I’m an asset. But our trusted personal bank manager is long retired and I’ve never met the new one – we exchange e-mails if we are lucky.
Here comes the ‘credit score’.
Since your relationship with your bank – and other financial organisations – is impersonal they have no other way of knowing whether you are a worthy risk or not except by using a number assigned to your name.
As Johnny Cash sings ‘I’m just a number, Lord, oh Lord’. (Okay, he was singing about being in prison but…).
A whole industry around collecting, collating and providing information about your credit history – and calculating your credit score – emerged.
And it has, as I was to discover, have a lot of power over our lives.
Who uses credit scores?
While I was chatting with the good people from Experian, and several other personal finance bloggers, it dawned on me that this ‘credit score, thing that I’ve been totally ignoring is far more important than I thought.
The reason I didn’t realise it is because it’s never been a problem for me. Remember the perfectly high score I mentioned before?
Yes, this is good; the higher your credit score is the less likely it is for you to realise how important it really is.
Here are some instances where your credit score can become a problem.
- When you try to get a mortgage (or re-mortgage). There is no two ways about it: if your credit score is poor your mortgage application will be rejected. And having a poor credit score doesn’t only mean that you have too much debt and have defaulted on payments in the past. It can also mean that you have no credit history; that you’ve never borrowed money and/or had credit cards. Yep, there are such people around – a close colleague of mine had a really hard job getting a mortgage exactly because he’d always had savings and had never borrowed or had credit cards. Conversely, if you have a credit score of 999 you can have a mortgage at 1.5% interest (and I’m exaggerating only very slightly).
- Credit cards. If your credit score is on the wrong side of good you don’t stand a chance of getting a 0% credit card and/or any of the deals.
- Loans. Just like with the mortgages, your credit score matters not only regarding acceptance but also affects the rate of interest you’ll be paying.
- Energy bills. If you fail an energy provider’s credit score threshold you are likely to be asked for a deposit; also, they may not offer their best tariffs.
- All kind of insurers. Insurers check our credit score when you choose to pay monthly; and if you don’t meet the required level, you may be put on a higher rate.
- Mobile phones. You are credit scored if you are getting a contract mobile phone.
- Landlords. When I was looking for rented accommodation several decades ago, all my landlord wanted was testimonials as to my character; now this was really easy. Today, landlords check your credit score and this can decide whether they agree to rent you the property as well as how much deposit they are going to charge.
You see, credit scores are used widely to assess the level of financial risk you present.
What can you use your credit score for?
What you can use your credit score for depends on how good it is. If your credit score is good you can use it to get all services and facilities mentioned in the previous part of this guide.
If your credit score is perfect, you can brag about it; though, I’m far from certain that ‘Hi, babe. Do you want to see my credit score?’ is a chat up line that will get you a date.
If your credit score is between average and hopeless, you’ll need to focus your attention on improving it. Otherwise, you’ll have to make sure you can buy your home for cash, you never need to borrow any money and you buy your mobile phones outright.
What you can’t use your credit score for?
There are many things you can’t use your credit score for.
What is important to remember here is that credit score companies are not perfect and that credit reports are not perfect either.
I checked my credit report because I read once too many times that it is a good way to take stock of all your debts.
Let’s try this one, I thought. I registered on Experian, I got my credit report and my credit score. And you know what?
Half my credit cards were not included in the credit report. You can’t use your credit report to make inventory of all your debt: some of it won’t be included.
As is the case, there is a very good reason for that. All credit cards issued before a certain date (I think it is before 1999) don’t appear on the credit report because you haven’t signed an agreement for that at the moment of issue.
If you want them included you have to authorise the issuer to provide the information to the credit report/score company.
How to check your credit score?
You can check your credit report and credit score using one of a number of companies that have entered this niche.
Just get on and follow the instructions: usually getting your credit report and credit score is really easy and takes no time at all.
When you are checking your credit report and score watch the charges: the service isn’t normally free and there are different payment models. And if you use one of the ‘free’ introductory offers, please make sure you don’t forget to cancel it if you don’t intend to check your score every hour or so.
How to improve your credit score?
There is a lot written on how to boost your credit score.
John has a friend – a statistician – who has done some research on credit scores. He claims that there are two factors that affect it most: a) whether you are on the voting register; and b) whether you have a mortgage.
Now, the voting register seems straight forward: this is about your identity and how settled you are.
When it comes to the mortgage it gets a bit more interesting. Having a mortgage is like a sign to be courted by other lender. Yes, you are an attractive borrower if someone has already found you attractive enough to lend you an awful lot of money.
So here come thirteen ways to boost your credit score:
#1. Register to vote (this is also good for democracy).
#2. Get a mortgage.
#3. Have a credit card; use it and pay it in full (this way you’ll not end up in debt).
#4. Spread your debt. This came up as a bit of a surprise to me but what really kills your credit score is not the total amount of your debt (though some lenders may look at that as well). What does it is whether your credit cards are maxed or not.
#5. Don’t close your credit cards; if you decide not to use them just not use them. (There is a school in personal finance that will advise to close them.)
#6. Use different sources of credit.
#7. Don’t ever miss a payment.
#8. Pay all your bills on time.
#9. Don’t apply for more credit cards if you may be rejected.
#10. Don’t withdraw cash on credit cards.
#11. Don’t play around with payday loans.
#12. Reduce your debt.
#13. Pay for insurance in one annual payment (house and car).
Six things you shouldn’t believe about your credit score?
Now that you know what credit scores are and how they are used, let me tell you about the myths that have developed around the industry.
Here are the six main things you shouldn’t believe:
#1. Credit reference agencies make decisions. They don’t; they just collect, keep and provide information.
#2. There is a credit score black list. This is like it’s come from the darkest of the conspiracy theory minds.
#3. The credit score of the previous occupants of your accommodation reflects on yours. Not true.
#4. Past debts don’t count. Well, they do.
#5. Friends and family living in your house affect your credit score. They don’t.
#6. Entries on your credit history are there forever. No; they are kept for six years.
This is in essence what everyone needs to know about credit reports and score and hoe to boost theirs.
Because credit scores are important and are unlikely to go away.
This doesn’t mean that I’ll be checking my credit score as often as the stats of The Money Principle (which is often) but I intend to do it at least once a year.
How about you? When was the last time you checked your credit score and what was it?