The Salary Calculator

Credit scores unpacked and myths debunked

by Madaline Dunn

With the cost of living crisis shooting up rent, food and fuel prices, an increasing number of people are turning to loans, credit cards, and overdrafts. Of course, a good credit score is often required to qualify for a low-interest-rate loan, so many people are now trying to determine what their credit score is and find ways to improve it. In fact, MoneySuperMarket’s data reveals that searches for ways to increase credit scores have increased by 506% in the last ten years alone.

However, despite so much hinging on a credit score, many people in the UK believe that the current system is not “fit for purpose.” Nearly 40% (39%) of people believe it’s unfair to judge a person based on financial decisions that they made up to five years ago, while 38% believe that credit scores don’t reflect their current livelihood and 34% believe that credit scores, in general, aren’t a good measure of a person’s creditworthiness. In general, credit scores can cause people a lot of concern and there are a lot of myths and misconceptions out there.

At The Salary Calculator, in this article, we’ll:

• Explain what a credit score rating is
• Dispel some of the myths that exist around credit scores
• Explore some of the ways you can improve your credit score

What is a credit score rating?

A credit score rating, at its core, is a way of measuring how much of a risk a person is when it comes to lending them money. FICO and VantageScore are the two main consumer credit scoring models, while Experian, TransUnion, and Equifax are the three national credit bureaus that offer different ratings. The former, for example, considers anything above 881 to be a good score, while the latter considers anything above 531 ‘good.’ TransUnion, on the other hand, considers scores above 720 a good rating.

A credit score rating is determined by a number of different factors, including:

• Your payment history – This means looking at whether you pay your bills on time and whether you’ve ever filed for bankruptcy. This is arguably the most important factor considered when calculating your score.
• Credit usage – This includes how much you owe in loans and how many of your accounts have balances.
• Length of your credit history – Money lenders like to see that you have a long history of paying on time.
• New credit – Applying for new credit can lead to a hard inquiry and lower the average age of your accounts.

Myths and misconceptions

When it comes to credit scores, many people are truly in the dark, and due to the myths and misconceptions floating around, just the mention of credit scores can cause people to spiral. Below we’ve compiled a list of the top myths:

Checking your credit score will negatively impact it – False

You can check your credit score as much as you like without it negatively affecting it. In fact, it can even be an indicator of financial responsibility.

Your credit score is impacted by your income – False

Your credit score is not impacted at all by your income and, in fact, only considers information found in your credit report, so, as outlined above: Your payment history, credit usage and length of your credit history. That said, if you were to lose your job or take an earnings hit, this could affect your rating indirectly in that it could detrimentally impact your ability to pay back your loans.

Paying off debt means it won’t affect your credit score – False

Unfortunately, even if you’re proactive in paying off your debt, the record of it can remain in your credit history for seven to 10 years.

My loan application will be rejected if I have a low credit score – Not always

You won’t always get a loan application rejected if you have a low credit score. However, you might be offered higher interest rates or a smaller loan.

How can you improve your credit score?

If you have a low credit score and you’re concerned that it’s going to detrimentally impact your future financial decisions, don’t worry, there are a few things that you can do to boost it.

First of all, it’s a great idea to keep up-to-date with how things are looking, so the experts suggest signing up with a tool like MoneySuperMarket’s Credit Monitor. This way, you’ll be able to check whether or not you’re veering into the red, and employ some of the below steps to steer you back on track.

Likewise, it’s important to keep your accounts up-to-date. So, if you’ve got an old bank account that hasn’t been used for years, it’ll be better for your rating if you close it. On the other hand, keeping open a bank account that you regularly use will positively impact your credit score.

Of course, paying bills on time is a big must for boosting your credit score, but be sure to check which ones count towards it – as only some of them do. And, also don’t forget to try and keep balances low on your credit cards, and try your best to pay more than the minimum required on your credit card, too.

Tags: Credit card, Credit score, Economy, Loans