Once you enter the grown-up world of work, and you start to earn money — and pay bills — and think about things you might like to buy, you may start hearing the phrase “credit score.”
You’re also likely to hear how having a “good” credit score can impact your future spending. But where do you get one? How do you get one? And — most importantly — why do you need a good one?
When that pay packet drops into your bank account for the very first time, it is an exciting moment. Let’s face it, you feel like a proper grown-up. You’ve got yourself a job, you’ve earned your own money and well, you’d certainly like to spend some of it.
And this is when temptation comes calling. We’ve all been there. A few Saturday nights out here, a couple of shopping sprees there — and we can quickly end up spending more than we can afford without giving any thought to how this might affect our financial present, let alone our financial future. And this is where understanding your credit scores comes in.
You are not alone
According to a recent YouGov survey, 69% of British adults don’t know their current credit scores or what they mean for them.
With this figure in mind, it’s fair to say that quite a few of us — regardless of generation — are in the dark when it comes to our credit scores. But in this case, ignorance is not bliss and there may be a time in the not-too-distant future when enlightenment is required. What if your newly acquired car breaks down and you need an interim loan to fix it? Or you want to apply for a new credit card or, gulp, a mortgage? Healthy credit scores can be pivotal to your ability to borrow or find preferential rates. But before we get into that, let’s go on a fact-finding mission.
Back to basics
What are credit scores?
Broadly speaking, a credit score is a number between 300 and 850 that depicts a consumer’s creditworthiness. It is based on your credit history, such as how quickly you repay debt, how high any debts might be or how much you have borrowed. As lenders use credit scores to decide whether someone is likely to pay back money in a timely manner, our financial lives may depend on them.
How your credit score is determined by Credit Karma
At Credit Karma, we work to a maximum score of 710 to calculate your credit score. Typically, the higher your score, the more likely you are to qualify for a loan with more favourable terms, such as lower interest rates, higher amounts and potentially lower fees.
- Scores 565 and below are considered Needs Work
- Scores between 566 and 603 are considered Fair
- Scores between 604 and 627 are considered Good
- Scores 628 and above are considered Excellent
Our scores may look different compared to other specialists because they’re calculated by TransUnion. Other providers may use different reference agencies and other parameters, but essentially all scores are based on information in your credit reports. Our Help Centre has some great guidance for understanding this!
What impacts your credit scores?
Your credit scores can be affected by a number of factors. For example, if you have built up a long-standing history of on-time payments, that suggests you have a positive longstanding relationship with lenders.
However, if you have a poor on-time payment history, this could suggest you may have trouble paying back a future loan and it is therefore a red flag to credit card providers, lenders and even utility suppliers.
Aside from increasing interest or incurring late fees, you may find that credit reference agencies are notified and your credit reports are impacted. Even moving house several times can have a negative effect. Why not take a look at our key factors page for more detailed information.
How to get a good credit score
So now that we know what a credit score is, how do we go about getting a good one? A good place to start is by paying bills on time – the sooner you pay, the better.
If you’re struggling to pay, get in touch with your lender and arrange a repayment plan or even a payment holiday. Other things to consider include whether your credit rating could be linked to another person, such as a spouse or a friend through a joint account. Their poor record may be bringing you down. You can also check for mistakes on your file or fraudulent activity, which are not your fault. Finally, take a look at 6 easy ways to improve your credit scores for more great tips.
Bottom line
The good news is that no matter your age or history you can always work to improve your credit score, and there’s no better time to start. And wherever you’re starting from, improving your credit health can improve your overall financial well-being. And staying on top of the information in your credit report is the first step toward progress.