What is credit?Credit is a way to obtain goods or services without paying the full amount in advance. You borrow from a lender, retailer or services provider and agree to pay later, either in a lump sum or instalments. Usually there is a cost associated with using credit; this could be in the form of interest – a percentage of the borrowing that’s added to the payments you make. There may be other fees associated with using credit too. These could include arrangement fees for setting up the credit and monthly or annual fees, which are all a form of cost of credit. As credit agreements can operate in very different ways, you should always check the terms and conditions outlined in a credit agreement before signing up, so you can be confident you can manage your borrowing well.
Credit is generally offered on a secured or unsecured basis, and there’s a significant and important difference between these two forms of borrowing that you’ll want to remember. As part of a secured credit agreement, you are required to offer up an asset to secure your borrowing against – this could be your home or a car logbook – for example. If you fail to make payments for your borrowing on time you could be subject to further charges. This can cause damage to your credit profile and score. The crucial point here is that if you’ve taken out secured borrowing, you could risk losing your secured asset too.
What is a credit report?A credit report is designed to give an overview of your credit profile including your borrowing history and current financial situation. It features important information such as addresses associated with you, lines of credit currently open to you and can provide insights into how you can improve your credit score rating and access to credit in the future.
Your credit report can also be a useful tool to help you keep a check on whether you’ve been a victim of fraud as a result of ID theft. This can sometimes be evident from entries you don’t recognise on your report. The very best credit deals are naturally open to those with great credit ratings, who are deemed to be lower risk by lenders. By taking time to check your report is free of errors and recognising where your credit score lies within the agency’s range, you can be more confident of which credit applications you’re likely to be successful with. This can help you avoid rejections that could damage your credit rating. And to give you an extra helping hand, our matching service will present you with tailored deals you’re more likely to be accepted for based on your individual needs.
What is a credit score?Your credit score is a way of representing your lending behaviour, history and other valuable in a format that makes it easy for lenders to judge how ‘credit worthy’ you are. In other words, putting into numbers how likely you are to be a good borrower. Contrary to popular belief, there’s no single credit score associated with us as individuals. Instead, these figures are compiled using information stored about you with the three UK credit agencies – Experian, Equifax and the agency we work with, Transunion. Different agencies and lenders use different numerical scales for their credit scores but generally speaking, the higher your score, the better. If your credit score is at the lower or even middle end of the scale, you may want to consider how you can improve your credit score so that you can better your chances of being able to take out certain financial products or accessing better borrowing deals.
How is your credit score calculated?
All kinds of useful financial information is used by credit reference agencies and lenders to compile your credit score. Agencies will analyse whether you’ve missed payments or made late payments recently or in the past and if you’ve ever defaulted on borrowing completely. They look at how much money you currently owe to creditors, the length of lending relationships and time you’ve held bank accounts. They will also assess how much credit you have at your disposal, as this helps give them an idea of whether you can afford to service more borrowing.
Publicly held information such as whether you are registered to vote at your home address or have court orders or CCJs against you will also be taken into account. And, as well as collecting information about your borrowing past and present with the likes of banks, credit card and store card lenders and mobile phone providers, they may also use information from some utility suppliers. If you’ve borrowed using a payday loan in the past, this will be particularly of interest as it is usually seen as a sign of poor money management. All of this information and more is processed using an algorithm so it can be presented as your credit score.
When lenders process an application from you for credit, they may refer to information from a single agency or several agencies. In addition, if they hold their own information about borrowing experiences you’ve had with them in the past, they’ll include that too. Banks and building societies could even factor in how much they’d like to have you as a customer for other products in a future. All of this combines to create your custom credit score for a particular product available at that time. With so much information to review and assess, your credit score is a simple way that borrowers use to represent your risk. Is it time you checked your credit report?