Whilst the UK may be struggling with record levels of credit card and bank loan debt, this issue is largely underpinned by a lack of financial literacy and understanding than a desire to spend recklessly.
This creates a window of opportunity for those struggling to repay their debts, so long as they commit to developing their financial literacy skills, settling their liabilities and improve their credit score going forward.
Of course, such objectives can be difficult to achieve, depending on your earnings and cost of living. However, we’ve taken the time to explain the fundamentals of credit scoring below, whilst asking how you can improve your standing in the eyes of lenders.
What is a Credit Score?
Let’s start with the basics; as a credit score is essentially a tool used by lenders to determine your eligibility for a specific credit card, loan, mortgage or similar financial service.
Each provider uses different information to build out your score, whilst it’s also fair to say that individuals have variable criteria when assessing applications for credit.
We’ll touch more on this below, but the most important thing to remember is that your credit report is the single most important factor when determining whether or not your qualify for a loan.
In this respect, your credit score represents the level of risk that you provide to lenders, which in turn will impact on whether they extend an offer of finance and the precise terms associated with this.
How are Credit Scores Calculated?
Whilst agencies may use different criteria and data to formulate your credit score, each one will essentially deploy their own mathematical model to create a value that accurately reflects your credit history.
In theory, this should provide a snapshot of your viability as a lender, both in terms of your overall viability and unique risk profile.
Now, although agencies vary in terms of their approach and are often loath to share their calculation process, it’s generally estimated that your payment history accounts for around 35% of your final score.
A total of 30% is reflects the amount of money that you owe to creditors, where as 15% refers to the length of your history.
The remaining 20% is split evenly between new credit lines and the type of finance sought, and whilst this model isn’t completely accurate it provides you with a general idea of what to expect.
How Do I Check and Improve My Score?
In truth, it has never been easier to check your credit score, not least because there are now various agencies and platforms that calculate this on your behalf.
The most trusted entities are Experian and Equifax, who offer you a snapshot of your credit score for free when you register for an account and enter your personal details.
For a monthly fee, these agencies also provide a detailed copy of your credit report online, and this can be used to delve deeper into your history and highlight viable areas for improvement.
This process also provides the first step towards improving your score, as you look to identify any errors on your report and report these to the necessary authority. Remember, the data stored on your report has a critical bearing on your score and risk profile, so updating settled or outdated accounts and ensuring that you’re registered on the electoral register can make a big difference.
The next step is to review your outstanding debts, before identifying the total amount owed and the number of creditors involved. If you’re struggling to meet your monthly repayments, you may want to consider entering into a debt management plan that consolidates your liabilities into a single (and manageable) monthly repayment.
Going forward, your goal should always be to reduce the amount of open credit accounts and debts owed. However, it’s important to retain a single active credit card and use this to make a single, affordable payment each month.
You should then settle this on the receipt of your monthly bill, in order to create a history of positive credit transactions that incrementally boost your score over time.