The term credit score often leaves many confounded. What is it? Why do I have one? What does it mean? These are all valid questions that frequently arise when delving into the realms of credit reports and borrowing, whether it be a mortgage, online loan or tenancy agreement. Having examined what credit reports are and how they contribute towards your current and future borrowing potential, it is now time to understand the concept of credit scores.
A credit score gives you an indication of your overall financial performance based on the information contained within your credit report. By consolidating all the information available in a credit report, a single numerical score is calculated that is comparable to the general population. Essentially it demonstrates how well you have been able to manage your finances, specifically when it comes to examining your credit history. In other words, it could be thought of as a numerical summary of one's credit report.
Each Credit Reference Agency (CRA) in the UK has their own unique way of calculating credit scores. Experian reports scores out of 999, TransUnion out of 710 and Equifax out of 700. Do not be alarmed by this – it is down to the methods used by each agency when carrying out their calculations. Due to the differences that exist between how each CRA compiles credit reports, these scores are not comparable on their own but could be comparable when looked at across scales.
In order for a potential creditor to be able to make a sound lending decision they need to have some indication of the borrower's ability to repay this credit in the future. As opposed to examining a customer's entire credit report, lenders could find it more efficient and convenient to first consider an individual's credit score. If a score is deemed worthy (or unworthy) enough, creditors could make a quick lending decision without the need to examine further information. If a score is considered low, but not low enough to be denied credit, creditors may then access the individual's credit report to assist with their final lending decision. There may be additional information in a credit report that could explain the negative or positive skew of a credit score.
The scalable nature of credit scores makes it both an important and highly beneficial tool for creditors. This trait allows for scores to be comparable across populations making it easy to identify what the average or the norm is across the country. With this information handy, creditors are easily able to compare the risk factor associated with an individual with the average of the population, easing their ability to make lending decisions. Without the existence of credit scores lenders would find it difficult to assess an individual's ability to stick to potential credit agreements which could lead to unnecessary detriment for both the lender and borrower.
Acquiring credit can be important in many scenarios in life, whether it be for larger investments, smaller purchases or emergency expenses. As each Credit Reference Agency has a different scale which they use to calculate scores, an individual's credit score will vary across each of the three agencies.
On a scale of 0-710, TransUnion considers anything above 604 to be a good score, with 566 and above being a fair score and anything below that being considered poor.
On a scale of 0-999, Experian considers anything above 881 to be a good score, with 721 and above being a fair score and anything below that being considered poor.
On a scale of 0-700, Equifax considers anything about 420 to be a good score, with 380 and above being a fair score and anything below that being considered poor.
Nowadays it is easy and convenient to check your credit score by going online. Each of the CRA's - Experian, Equifax and TransUnion – makes it possible for anyone to access their credit score through their websites. Anyone over the age of 18 and who has taken out any type of credit in the past will have an existing credit report and corresponding score.
These figures are however not set in stone and can be evaluated differently depending on each creditor's personal risk profile. Therefore, a lower credit score does not always indicate that you will be denied credit. In the same respect, a higher credit score does not always indicate that you will be granted credit. Always research the different creditors available to see whether you will be accepted before making any final decisions.