I like the idea of being able to influence what financial organisations think about me. Most commonly, I can do that by maintaining a high credit score. But what is it and what to do if your credit score is not so great?
What is credit score?
Wikipedia puts it nicely: ‘A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report information typically sourced from credit bureaus.’ For you and me, credit score is a number of points indicating how you interact with debt. Banks are not interested in how good you are in budgeting – they want to know if you’ll pay them back if they lend you money.
Why is a high credit score useful?
Different credit bureaus score slightly differently and up to a different top score. Universally the higher your score, the easier it will be to obtain lower interest on loans should you seek to take out a loan, including credit cards. This is because, in an automated algorithm’s eyes, the higher your credit score number is, the more able you are to handle servicing debts. It doesn’t mean that you are good with money – it just means that you can pay a debt down.
What sort of things show up on a credit report?
Credit report is the information which underpins your credit score and usually involves things like:
- Short term loans (car loans, credit cards, hire-purchase agreements, personal loans etc)
- Long term loans (mortgages, large personal loans etc)
- Bankruptcies, court judgements, voluntary agreements etc
A credit report also includes a set of your previous addresses and any other relevant information which might be pertinent to your financial life.
How to increase my credit score?
There are several things that you can do to improve your credit score. This is particularly useful if you are planning to take out a traditional mortgage or are using a credit card for whatever reason you are using it for.
The first long term thing you can do is to pay down any debt that you might have. This includes long term debt such as mortgages and short term debt such as credit cards. Avoid closing your credit card accounts unless necessary though.
If you are not looking to pay down debt fast, the other option is increasing your credit limit. This can be done by either taking a credit card out or increasing the credit limit of any existing cards you might have. The idea here is to ensure that you are not keeping a balance higher that up to 30% of your available credit at any given time on consumer loans. Yes – you are increasing your credit limit but you are not spending more. This means that if you have a credit card with £3,000 limit, you never cross a balance line of £900 on it, at any given time. The key is to have a good chunk of credit available, but not actually use it.
Importantly, you will also need to pay any such debts down to keep below the 30% ratio, make payments on any other financial commitments and basically be fiscally responsible.
Bankruptcies, CCJs and other missteps.
If you have ever filed for a bankruptcy, it stays with you for a while. In the UK, a discharged bankruptcy remains on your file for 6 years. Undischarged stays with you for life. In the US, chapter 7 stays on for 10 years and chapter 13 for 7 years.
CCJs (county court judgements) in the UK, unless paid back in full within one month from the judgement, stay on your credit report for 6 years.
Administration Orders, Individual Voluntary Agreements and Credit Agreements stay on for 6 years from the date of settlement. Unless you can get yourself a whole new identity (don’t do that), they will be with you for a long time and there isn’t a way to fix them quickly, so be responsible.
A credit report search stays on your file for up to 13 months and can actually dent your score. Be careful when applying for mortgages and loans because having multiple searches within short timespan can cause a level of distrust from financial organisations. Before applying for anything, check whether it will have impact on your credit score by leaving a search trail. If it does, you must do your research before you apply. Any rejected applications also have a negative impact so research, research and research before you ask anybody to lend you money.
Why check your credit score?
There are two reasons why you might want to monitor your credit score and view your credit report. Firstly, if you are looking to take out a loan, you will want to know where you score. Secondly, seeing your credit report allows you to spot identity fraud – should something financial show up that is not part of your financial history, you’ll know somebody is using your details to fraudulently obtain finance.
I don’t pay to monitor my credit score to companies such as Equifax or Experian. Instead I use either trial versions of their services or a free service called Noodle – it’s available in the UK but no idea if you can access it in any other countries.
What does Dave Ramsey say about credit score?
Dave Ramsey tells you not to have one. To do that, you would have to never use any sort of financing including credit cards and property loans. It is quite rare that other bills, including rent payments, are reported to credit bureaus. Importantly, no credit score does not equate to 0 credit score which is somewhat impossible anyway. If you have taken out credit cards or financing in the past, it usually takes around 6 months for any settled debts and closed accounts to start coming off your credit report and credit score.
If you opt for not having a credit score, should you wish to take out a loan such as a property loan, you will need to find a company able to offer so called manual underwriting based on your history of being able to handle standard financial commitments such as utility bills and rent payments. It’s entirely possible to get a mortgage without credit score. But bear in mind that if you are taking out a mortgage, it will give you credit score.
Credit score and working and living in the UK
Employers in certain industries will check your credit score and credit report. If you don’t have a credit score and your credit report is blank, they will likely ask some intrusive questions to find out why and what.
Some of the industries which require credit report:
- Finance and banking, both retail and investment
- Mortgage brokers and financial advisers employed by a firm/consultancy
- Law enforcement
- Border agencies such as TSA
Additionally, at least in the UK, when renting a property the estate agent will usually carry out a credit check on all renters. If your credit check brings no results or low results, you will likely need to consider bringing so called guarantor to guarantee your rent payments.
Is there anything else you’d like to know about credit score and credit reports? Leave your questions in the comments.