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How to Understand your Credit Score

Credit scores can appear confusing when you’re trying to borrow money. Your credit score is very important, as it’s the system lenders use to help them decide whether they should give you a loan or credit card.

An average credit score can range from 300 to 850. If you don’t have a decent credit score, it will impact negatively on your financial well-being, because if you appear to be a high risk, there is less likelihood you’ll get a loan.

credit score

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What is the average score?

The average credit score in the UK is quite low. A number of major credit agencies keep a record of people’s financial history and provide information to lenders. According to Equifax, one of the main credit reference agencies, the average score is 380, which is classed as “fair”; a score of up to 279 is classed as “very poor”; a score of between 280 and 379 is deemed “poor”; a score of 420 to 465 is “good”; while any score of 466 or higher is “excellent”.


Are there different types of credit scores?

There are two types of credit scores; custom and generic. The most basic is your generic credit score, which is used by many lenders to determine the general credit risk of lending you money, based on the chances of paying it back.

The information is kept on file by the UK’s three main credit agencies, based on your behaviour in the past with loans and credit cards. An individual can access their generic score across all three credit reporting agencies, Experian, TransUnion and Equifax.

A custom credit score is developed by individual lenders, using credit reports and other information from their own portfolio, such as your personal account history.

A custom score is unique to a specific business. It may be used by a lender, such as a credit union, for example. This type of credit score can apply to different types of lending, such as mortgages or vehicles.


Why do lenders use credit scores?

Before credit scores began, lenders had to manually look at every applicant’s credit report in detail to determine whether they should be granted credit. The whole process was extremely time-consuming and could also lead to mistakes and unintentionally biased results.

Lenders were making decisions, often with little bearing on an applicant’s ability to repay loans based on their actual financial circumstances. Having credit scores helps lenders to assess the risks more accurately and fairly to avoid guess work and errors.


Credit scores: What you can and can’t do

A good credit score can open up many new borrowing opportunities. You are more likely to be accepted by a lender when it comes to borrowing money, whether you want a personal loan, a car loan, or a credit card. You’re more likely to be accepted for a mortgage and if you go for a loan through a broker, they will have more options to offer you a good deal from their panel of lenders.

People with a poor credit score will find their borrowing options limited. If your credit score is very poor, you will be unlikely to be able to borrow money or get a credit card at all. Some lenders offer guarantor loans to people with a poor credit score. This usually has to be a homeowner who promises to pay off the loan should you default. However, unless you have a family member who is willing to stand as guarantor, you will probably be hard pushed to find someone who trusts you enough to be responsible for your debt.

When it comes to credit cards, a poor credit score means you may be able to get a card, but it will have higher interest rates and a low credit limit.

In the worst cases, you won’t even be able to open a regular bank account and will have to get one for people with poor credit, which won’t have an overdraft facility and may just have a cash withdrawal card, instead of a debit card.


What affects your credit score?

While each scoring model can use slightly different criteria, there are several common factors that affect your credit score. The most important one is payment history, as even if you miss just one repayment on a credit card, however small, it can significantly impact your credit score.

Lenders need to be sure you’ll pay back your debt on time, so if they’re considering giving you a loan, the fact you have missed one or more payments in the past doesn’t bode well. Some credit reference agencies say payment history counts for as much as 35% of your score.

How much money you owe in loans is also important. Known as your credit utilisation ratio, it is the second most important factor when determining your credit score. A formula is used that decides how much of your available credit you use. It gives a snapshot of how much you rely on credit in your day-to-day life. If you use more than 30% of your available credit on a regular basis, this can be a red flag to lenders.

The number of applications for credit that you have made recently, and the number of new credit accounts you’ve just opened, can also impact your score. If you have opened too many accounts or made multiple inquiries, this can hurt your credit rating.


How can you improve your credit score?

It is relatively simple to improve your credit score. Even if you are short of money and have missed a lot of repayments on credit cards or loans, it’s in your best interests to contact the individual lenders and set up a repayment plan.

You may be pleasantly surprised that most reputable lenders will let you set up a repayment plan at an affordable rate after assessing your circumstances. As long as you keep up the repayments, even if it’s only £5 a month on a big debt, this will have a positive effect on your credit rating and can gradually rebuild it.

There are also some credit cards and bank accounts for people with bad credit that have a “credit builder” function in the app. This enables you to put a little money aside each month that your bank passes on to the credit reference agencies to show you are behaving in a responsible manner. Overtime (usually about a year), this can start boosting your credit rating again.


How has credit scores changed in the past year?

The Covid-19 pandemic has had a negative impact on many people’s finances – and falling behind with payments can affect your credit score.

However, many major credit reference agencies are taking a helpful approach to people who have been unable to afford repayments due to the pandemic. Some have permitted a payment holiday to give borrowers more time to make the repayments.

If the account was up to date before the pandemic, your account will still show as being on schedule at the end of the payment holiday. However, if you were already in arrears with payments, this will be reflected in your credit report.


Logbook loan

If you have a bad credit rating, this doesn’t affect your chances of a loan quote with Logbook Loans 247 – a great way of borrowing money in the short term to help you through hard times, even if you have CCJs or bad credit history.

Provided you are the legal owner of your vehicle, and it has a resale value of over £2500; we can lend on the strength of its value and your ability to make repayments. We treat each application on its individual merits.