You often hear about credit rating and credit scores, but understanding them is a different matter. It’s important that you do understand how the system works, though, because it’ll help you to build and maintain a good rating, which in turn will allow you to access credit when you need it.

Your credit score or rating (it’s actually the same thing) is a measure of how much of a risk you are to lenders who extend credit to you. If you’re likely to pay the money back on time and without any chasing, you’re a good risk.

The UK’s credit reference agencies

The UK’s three main CRAs use scoring scales from 0 to 1,000. A score of 0 usually means you’ve never had credit before rather than being unreliable with money. You can find out more about how your credit score impacts your daily life by visiting the Credit website.

There are two types of credit scores;

They are generic and customised credit scores.

Lenders and businesses use generic scores to assess how risky it is to lend money to you. You can see your generic rating by obtaining it from one of the three major CRAs – Equifax, Experian or Callcredit.

Individual lenders use customised credit scores for their own customers. They include information from generic reports, but they also use the information the lender itself holds on its customers. Lenders that specialise in particular forms of credit, like auto finance, tend to use customised reports.

How you can improve your credit scores

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If you worry (or know for a fact) that your own rating isn’t excellent, you can do things to improve it. You need first of all to know what sorts of information go into making up your rating; these include:

• the total amount of debt you owe to all your creditors;
• what type of accounts and credit agreements you have;
• the number of late or missed payments, and
• the age of your accounts – if you’ve had the same debts for a while then it’ll count against you.

All these factors show you what was affecting your credit history when it was calculated and recorded. You can also see where you’re letting yourself down and where you need to pull up your socks. If you have a bad habit of forgetting payments (even though you have the funds) and end up getting calls from creditors, then this will count against you. You should set up a standing order to prevent this from happening and to improve your score.

Why do lenders use your score?

Before standardised credit scores were available, lenders used to look through each applicant’s history item-by-item to assess their reliability. This was a very time-consuming process and led to some lenders making decisions based on gut feeling rather than fact, which isn’t always reliable. This, in turn, led to some applicants being refused credit unfairly and others being approved when they were, in fact, unable to service the debt. Credit scores are quick and efficient; they use objective metrics and so are fairer than intuition!

*collaborative post*