Do I need to check my credit score?

Credit scores, also known as a credit rating, have long been the thing that holds all the cards when it comes to personal finance. Your credit score is your financial fingerprint, carrying a lot more weight than you might imagine. Whether you're planning to buy your dream home, secure a business loan, or even just apply for a credit card, your credit score plays a pivotal role in determining your financial health.

The credit rating system is used among many major economies, such as the UK, USA and Canada, however they are not linked. Your credit score in the US for example will not affect your credit score in the UK. As we are UK based, we’ll be discussing the UK credit scoring system.

Let's dive into why checking and monitoring your credit rating is a smart move, what specific aspects to pay attention to, and how to boost your score for a brighter financial future.

Why is my credit score so important?

Put simply, your credit score is a numerical representation of your creditworthiness, kept together on a credit file, reflecting how likely you are to repay borrowed money. Think of it like your medical records, but financially. It has all your history of your finances, and yes it remembers your embarrassing moment that landed you in A&E in the summer of 2008, and it’ll forever keep a record of it. These records are collected by credit reference agencies from banks and credit lenders, and kept on your credit file.

Lenders, such as banks and credit card companies, use your credit score to evaluate the risk associated with lending you funds. Just like a new employer would check your references if they were to hire you for a new job, banks and lenders would check your credit score. A higher credit score indicates a lower risk borrower, which can open the doors to a world of financial opportunities.

You are provided with a credit report, created from your credit file, which amalgamates a variety of data to give you a credit score. The higher your score, the lower risk you are deemed, meaning more doors are open to you. When lenders pull your credit score, they will also pull your credit report and look through specific areas that are monitored to ensure you match their criteria.

What’s looked at in my credit report?

When a credit check is ran on you, mortgage lenders, other lenders or any other type of creditor will look at some key things to get an idea of your credit history.

Payment history

This is a record of your past borrowing behaviour. On-time payments have a positive impact on your score, while late payments, defaults, and bankruptcies can significantly damage it. These are all noted in your credit report, and while different credit reference agencies may get different info from different banks or creditors, they do have a broad scope, chances are most of your previous lines of credit will be shown on your credit report.

Credit utilisation

This is the ratio of your credit card balances to your credit limits. Keeping your utilisation low (typically below 30%) demonstrates responsible credit management. So for example, if you had £1,000 available to spend on a credit card and you only spent up to £300 a month and paid it off, this shows you are responsible with extended credit, lowering your risk factor and boosting your credit score.

Length of credit history

Your credit report will show everything you’ve done financially from the very beginning, and track it throughout your life. A longer credit history can have a positive effect on your score, especially if it’s been a good history. It shows you have a track record of managing credit over time. I have a few friends who have never owned a credit card, never financed anything or were never in much of a position where they owed money and had to pay it back. Some of my friends lived with their parents until they decided to buy their first home, and this is where they ran into trouble.

They had no credit history, so the lender couldn’t check if they were responsible enough to be given a mortgage. It does seem a bit backwards, having to prove that you can repay debt before getting into bigger debt, shouldn’t not having any debt be better? But actually no, the lenders don’t necessarily want you to have debt, they want proof that you can pay it back. This is just something to take note of if you are looking to buy a house in the future or take out an extended line of credit, build up your credit score with smaller things first, to get the proof that you’re a low risk borrower.

Types of credit

The credit report will note down all the different types of credits you’ve had. A mix of credit accounts, such as credit cards, mortgages, and personal loans, can positively influence your score. It indicates your ability to manage various types of credit responsibly. Going back to the point above about them needing proof, this also points back to the point I made at the beginning about employers checking references. You know what else employers look at? Your CV. They want to know you have various skills and not just one, lenders are the same. They’re looking for all-round control of finances, not just in one particular area.

New credit inquiries

Your credit report will show if you’ve made any new credit inquiries recently. Opening multiple new credit accounts within a short period can negatively impact your score, as it may signal financial instability. So this is the flip side, they want you to have a variety of credit types, and they want you to manage them all effectively to prove you’re trustworthy, but they don’t want you to be opening lines of credit left right and centre.

The reason for this is how it looks. Remember, the lenders don’t know you, so the only thing they have to go on is your credit score. If your credit score shows you’re opening 3 credit cards a week, to them it could look like you’re just scrambling around for money, and trying to get it where-ever you can. This can raise flags that you’re in financial trouble. So if you are opening multiple lines of credit to help improve your credit score, do it over a long period of time.

Why do I even need a good credit score? What does it get me?

A good credit score basically means more things are open to you, both in a variety of choices and circumstances. For example, if your credit score is ok, you’ll be able to get a loan. But if your credit score is great, you’ll be able to get a loan with better terms, such as low interest payments. A good credit score not only opens the door for multiple products, but also better terms.

Here are some examples:

Low-interest loans – With a high credit score, you're more likely to qualify for loans with lower interest rates, saving you significant money over the life of the loan.

Mortgage approvals – Lenders use your credit score to determine your mortgage eligibility. A higher score can lead to better mortgage terms and rates.

Favourable credit card offers – A strong credit score opens the door to premium credit card offers with attractive rewards, perks, and benefits.

Renting opportunities – Landlords may consider your credit score when evaluating rental applications, so a good score can increase your chances of securing your desired rental property, especially if you’re not the only person interested.

Insurance premiums – Some insurance companies use credit scores to determine premiums for auto and home insurance policies.

How can I boost my credit score?

Getting a better credit score requires patience and discipline, remember what we said about not trying to do everything at once above? If you try to do too much, take out too much credit for example at the same time, it will raise a red flag. So go slow, build a plan, and execute it over time.

Here are 5 top tips to help boost your score in the right direction:

1. Pay your bills on time

Simple, yet so effective. Timely payment of bills, loans, and credit card balances is crucial. Set up reminders or automatic payments to ensure you never miss a due date.

2. Reduce credit card balances

Going back to the credit to limit ratio, always aim to keep your credit card balances well below their limits, preferably under 30%. So if for example you have a £1,000 limit on your credit card, try not to spend over £300 on it.

3. Pay off your credit card bills in full every month

Whilst also keeping your spending below the 30% ratio, try to pay the bill off in full every month. This will not only help you boost your credibility as a trusted borrower but it will also help you avoid any interest fees. Win win.

4. Diversify your credit mix

Consider having a mix of different types of credit accounts, such as credit cards and instalment loans, to demonstrate your ability to manage various types of credit responsibly. These don’t need to be big amounts if you’re just trying to build your credit score, the goal here is to prove you can have money, not go wild with it, and pay it back in a timely fashion. So even taking out a loan for £100, keeping it, and paying it back when it’s due will help boost your credit score. However, always avoid payday lenders. Go with reputable banks.

5. Regularly check your credit report

Monitor your credit report for inaccuracies or fraudulent activity. You can get a free statutory credit report from credit reference agencies within the UK, we would personally recommend Experian. They’re thorough, have everything you need to know on there and they are used by many leading banks and lenders, so you see what they see.

TIP: We have more tips on how to boost your credit score in our Top 10 tips to boost your credit score blog.

Your credit score is a powerful financial tool that can significantly impact your life. By monitoring and understanding your credit score, you empower yourself to make better decisions which can, secure better financial opportunities, and pave the way for a stable and prosperous financial future.

Remember, a good credit score isn't built overnight, but with consistent effort, you can watch your score rise and your financial options expand.

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