Understanding Credit Scores

Understanding credit scores

About your credit score

Applying for credit and understanding your credit score can be full of Baffles. This guide can help you understand how your credit score works, and how to boost it.

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Representative 15.9% APR (Variable)

Representative example: If you borrow £7,500 over 5 years at a Representative APR of 15.9% and an annual rate of 15.9% (fixed) you would pay £177.82 per month. Total charge for credit will be £3,169.20. Total amount repayable is £10,669.20. Minimum repayment period is 12 months. The %APR rate you will be offered is dependent on your personal circumstances. Freedom Finance is a leading credit broker and not a lender.

What’s a credit score?

A credit score is like a point system made up of your financial history. This score is used to tell lenders if you’re eligible for a loan or credit.

How is my credit score worked out?

Your credit score is calculated using information based on any credit applications you’ve made from your current or previous addresses, any history of debt, including any County Court Judgements (CCJs), Individual Voluntary Arrangements (IVAs) or bankruptcies. It also shows how you’ve maintained repayments to your credit cards, store cards, loans and mortgage.

Why is my credit score important?

Lenders use your credit score to decide if your loan application will be accepted, as well as the APR (Annual Percentage Rate) you’ll be offered. If you have a good credit score, you’re more likely to be offered better rates and be accepted for a wider range of products. To lenders, you’re considered low risk.

If previous financial difficulties have left you with a poor credit score, then it could be tricky obtaining credit in the future. You’ll also be considered higher risk by lenders, so it is more likely any borrowing will come with higher interest rates.

What is a credit footprint?

Every credit and loan application you make leaves a footprint, which lenders use to build up a picture of you as a borrower. And when you receive credit or a loan, you make a footprint based on how you manage your repayments.

If you miss loan or credit card payments, this suggests you are less able to manage your finances, so it will have a negative impact on your credit score. History of County Court Judgements (CCJs), Individual Voluntary Arrangements (IVAs) or bankruptcies will also damage your credit score.

Is my credit score all that matters?

Your credit score isn’t the only thing that lenders look at when you apply for a loan or credit. Different lenders use different criteria to decide whether to lend to you, building up a picture of you as a borrower based on the information they have. So it’s not just your credit score that matters, but also any history you have with the lender as well as the information you provide on your credit application.

Understanding credit score risk

Credit scoring works by trying to predict how you as a borrower will manage your loan or credit in the future. Your score then indicates to lenders how risky a borrower you are based on your borrowing history. It also gives an indication to lenders whether you’re a vulnerable customer. If the lender looks at your credit score and thinks that lending to you might give you future financial problems, they won’t offer you credit.

Don’t appear desperate

Every time you make an application for a loan or credit, it’s recorded on your credit file for a year. So it’s sensible to plan ahead and prioritise your loan or credit applications rather than rushing into yet another application. Too many credit applications over a short period of time can result in rejection. This is because it can signal to lenders a number of possible issues, including potential fraudulent activity and applicants applying for more credit than they can afford.

Handling rejection

So, you’ve got the perfect credit score, yet your application has still been rejected. Why? Well, credit scoring doesn’t simply mark borrowers as high or low risk. It’s much more than that.

It could be something as simple as incorrect details on your report. Make sure you go through your report and double check they have all the right information.

Don’t be disheartened. Every lender has a different scoring system so it doesn’t mean your next application with another lender will automatically be rejected. Just remember to not make too many credit applications close together as this also can lead to rejection.

We’ve all got history. Or have we…?

It’s not just a poor credit history that can count against you. Many people are surprised to discover that having no credit history is also a problem. Lenders can be wary of borrowers with no history, because they have no information to base their risk assessment on. So it may be a good idea to start building one.

In need of a credit score boost?

There are things you can do to build up a good credit score. It is a good idea to check your credit file annually or before making any application as lenders will review your file prior to making a lending decision.

It’s also worth making sure you’re registered on the electoral roll at your home address, and that your credit reference file is up to date. There are also credit builder cards available on the market for those with a poor, or no credit history. You can use the card to pay for your usual monthly purchases to build up your score. Just remember to repay in full each month so you don’t pay the high interest rates.

Just remember to repay the balance in full every month. Otherwise you’ll find yourself not only paying high interest rates, but this could also have the opposite effect and negatively impact your credit score.

For more useful information on boosting your credit score, read​​ our handy guides.

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