Your credit score is a number that summarises your creditworthiness. Your debt management is recorded so other potential creditors can decide whether they’ll lend you money, and at what interest rate you’ll have to repay it. Understanding the importance of credit scores really helps to grow your financial literacy and balance your financial wellbeing.
Whenever you want to buy a house, take out a loan, open a credit card, or even get a mobile phone contract, the companies you deal with will want to know how much of a risk you pose when they lend you their money. That means they’ll look at your credit history on your credit report. Here, Loqbox answers the question, “why is a credit score so important?” Let’s get into it!
What is a credit score and why is it important?
In simple terms, credit scores are just numbers that let you know how likely lenders are to give you credit. So, the way you’ve handled your finances in the past - particularly money that you’ve borrowed - affects how much money you can borrow in the future, and how much interest you have to pay to get it.
Before we look at the importance of a good credit score, let’s understand how they’re calculated. When you borrow money and make (or miss) your repayments, your activity is reported by the lender to the top three credit reference agencies (CRAs) in the UK: Experian, Equifax, and TransUnion.
The CRAs record your good and bad activity on your credit report and use it to generate your credit score. It’s important to mention that your credit score is only visible to you. Lenders don’t actually see it. They check the details of your credit report. Your credit score is just a neat way to summarise what lenders see when they do a credit check on you.
You can read more about what affects your credit score here. But at a glance, things that grow or sink your credit score include: making or missing debt repayments, having bankruptcies or CCJs, how much of your available credit that you’re using, how many lines of credit you’ve applied for, and whether you’re registered on the electoral roll.
Each CRA uses a different system to score you, and your score with one one doesn’t necessarily relate to the next. They can also have missing or incorrect information on one that is correct on another. However, generally speaking, the higher your score, the better.
So, as the eagle-eyed will have spotted, you’ve actually got three credit scores! If this is news to you, you may want to find out what your credit scores currently are with all of the CRAs. Fortunately, you can check your credit scores with all three for free, and without hurting them, using these services:
*For transparency, we wanted to let you know that ClearScore pay us a small commission if you sign up using this link.
So, why is a credit score so important? We know that the higher your credit score, the more likely you’ll be accepted for a loan, credit card or mortgage. But also, you could be able to get a better deal on your loan. That means you might save thousands in interest payments! Good credit scores can also open up higher credit limits, and even help you get certain jobs.
Which credit score is most important?
There are three main credit reference agencies (CRAs), as we mentioned before. But which is the best, or most important one? Of the three CRAs (Experian, Equifax and TransUnion), it’s difficult to say which one is most important as each lender might use a different CRA to make their decision on whether they should lend to you or not.
Experian is the CRA that the majority of lenders use, followed by Equifax, and then TransUnion. When you apply for credit, you can ask the lender which of the CRAs they use to credit-check you. But it’s important to keep an eye on all three CRAs as they store your information differently, and you may notice errors on one report, but not the others.
So, how important is a good credit score?
A good credit score is really important for financial wellbeing, and to get the best credit deals. A high score can help you get accepted for credit at lower interest rates and better terms which can save you thousands over time.
On the other hand, low credit scores can make it challenging to get credit and could mean you’re offered higher interest rates, which can make borrowing more expensive in the long run.
How can I grow my credit score?
Now you know about your credit score, why it is important, and why you want to get it as high as possible, Loqbox has some great news! One of the easiest ways to build your credit score is by starting your Loqbox membership to access Loqbox Grow, Loqbox Save and Loqbox Rent, for just £2.50 a week. Your credit score could grow 300 points in the first three months of using all of the great credit-building tools your membership gives you access to.
Improvements to your credit score are not guaranteed