A-Z of understanding credit

At Loqbox, we care about breaking down the complicated jargon and demystifying money. We know that knowledge is power. So let us help you get started with this breakdown of the top terms to know:

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APR (Annual Percentage Rate)

When you see APR written next to a financial product (like a credit card or loan), this indicates how much you’ll pay on top of what you choose to borrow in interest, fees, and any other charges that are added to the loan.

If you are unsure of which new credit card to apply for, it’s a good way to compare the best rates. ‍‍

‍As a general rule of thumb, when borrowing money, the lower the APR the better. And when saving, a higher AER (Annual Equivalent Rate) will earn you more money.

Budgeting

We know, budgeting feels like the least sexy thing to do with your money. 

But getting on top of your finances and creating a monthly budget can make you feel ASMR-tingly good. Try to think of it less like a diet and more like a tool to help you feel in control.

Get your payslips and outgoings written down on paper, or, if you’re a whizz with a spreadsheet, create a pie chart of where your money goes each month. 

Then, think about those outgoings. Are they what you thought they were? Is there anywhere you could cut back? If you’re not sure where to start with making your first budget, here’s a quick method many people use. 
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‍Note: Don’t beat yourself up if you go off-budget. It happens to the best of us. Keep at it, reassess your spending if needed, but most importantly, know that you’ve got this!

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Credit Reference Agencies

The UK has three main credit reference agencies (CRAs for short); Experian, Equifax, and TransUnion. 

Each securely holds a file of your financial data. This includes things like when you’ve applied for credit, your open bank accounts, and how you pay your bills (aka your credit history). 

They are also the companies that create your credit scores — although they each have a different scoring system respectively, which means you have three credit scores, not just one. You can read more about that here.

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Defaults

If someone repeatedly misses their payments, the lender may decide to close down their account. 

This is marked as a ‘default’ on their credit file and will show up on your history for six years (eek!). Although, if a payment was missed due to an unavoidable reason (i.e. a grave illness), you can ask the credit reference agencies to add a Notice of Correction to explain what happened. 

Be sure to still repay any debt owed as it could lead to a more serious CCJ (County Court Judgment) if left outstanding.

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Equity

Say someone buys a house for £500,000. By putting down a £50,000 cash deposit alongside a £450,000 mortgage loan from their bank, their cash deposit would be considered their ‘equity’.

If the house value increases to £600,000, then the homeowner’s equity is now £150,000 (that’s their £50,000 original deposit + £100,000 of added value to their property).

If the house value decreased by more than the original deposit, then the homeowner would have ‘negative equity’. 

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Fraud

A helpful bonus of regularly checking your credit reports is that it can highlight any fraudulent activities that may be happening with your personal data, and subsequently, be harming your credit file. 

Running a free check on ClearScore (working with Equifax’s data)* will give you direct access to the accounts open under your name. And for a small monthly fee, they also offer a Protect feature that scans your email address on the Dark Web for stolen or compromised passwords or data.
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You can also check for fraudulent activity with Credit Club (for your Experian data). And use Intuit Credit Karma (to check your TransUnion’s credit report). And the reason we suggest you use these three services is that they also allow you to check your credit scores for free and as often as you’d like to without harming your credit scores.
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_{*For transparency, if you do decide to sign up using the link above, we receive a small referral fee.}

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Good vs Bad Credit Scores

Many of us feel admittedly scared to check our credit scores for the first time. And if the number does leave you feeling downhearted, you’re not alone. 
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‍What even is a good or bad credit score, anyway?! 

Here at Loqbox, we care about making money matters easily understood and accessible for everyone. And the bottom line is: These numbers do not define you. 

It is just a way for lenders to see on paper that you are a safe bet.

Persistence and consistency are key when building your credit history. So if your credit score is not where you want it to be, slow things down and start building evidence that you are an excellent person to lend to.

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Hard Checks

Hard credit checks happen when you apply for a new credit agreement, such as applying for a new credit card or opening a new utility account. These types of checks are shown on your credit history.

Hard checks are totally fine, but try not to apply for multiple products that require these hard checks in a short time period. Lenders could view this as poor money management and be less inclined to lend to you. So one hard check every six months is best as hard checks cause your score to drop. After this time, it should start to rebuild itself.

‍Top tip: If you’re looking to apply for a mortgage soon, it wouldn't be a good idea to apply for multiple credit cards or get a car on finance in the months just before. Spread those out.

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Interest

Your interest is what the lender charges you to borrow money from them or what is paid to you when you deposit money with an institution. There are a few common categories:

Simple Interest (aka Nominal): the basic rate of interest

For example: if you want to borrow £100, the lender charges you 10% interest (£10). That means £110 is repaid in total.

Compound Interest: when interest builds on top of interest 

If you save enough to make £20 in interest one year, then the next year, you earn interest on that £20, as well as the rest of your savings. YAY!

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When taking out a mortgage you can opt for a Variable Rate or Fixed Rate

Variable Rate Interest:

The mortgage repayments may go up or down depending on the Bank of England’s rate of interest, known as the ‘base’ or ‘bank’ rate.

Fixed-Rate Interest:

The mortgage is fixed at the same rate of interest for a period of time. This means your monthly repayments are the same for the fixed term you agree to (i.e. 2 years, 5 years, or 10 years). When that period ends, you can choose to remortgage or switch to a variable rate.
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See also APR ⬆ and Zero Percent Interest ⬇

Joint Accounts

Once you open a joint account with someone, or become named with someone else on a bill, it’s worth knowing that you become co-scored — which means your credit scores will link.

If you live with someone but aren’t named on the bill with them then this doesn’t happen.

Here are some things to think about:

• If the account goes into arrears, everyone named is responsible for repaying
  
  
• For joint accounts, the other person(s) could withdraw all the money
  
  
• The co-scoring could mean your efforts to raise your credit score are diminished if the other account holder has a poor credit history or doesn’t manage their money well.

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‍Setting up Direct Debits or standing orders for your bills from your individual accounts, or using a joint email address to log in to your energy supplier’s website are good alternatives if a joint account doesn’t feel right for you.

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Keeping up with the Joneses

Even the most hardened saver is allowed to desire life’s luxuries. There’s no shame in a treat every now and then. 

But beware of the trap of feeling like you’re not keeping up with everyone else. We’ll probably survive without the latest self-driving car, or trainers that, let’s be honest, are so expensive you keep in a shoebox anyway. 

We’re not suggesting you don’t purchase the necessities of life. If you accidentally drop your phone down the toilet and rice cannot save it, by all means, get a new one! It’s just that there’s no harm in shopping around for the cheapest deals in the process.

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Low Credit Utilisation

It’s no secret that lenders like to see you doing a great job at managing your money. In their eyes, just because you have a credit limit of, say, £1,000, doesn’t mean you need to spend that much. 

In fact, lenders would prefer it to be below 25% (£250 if your limit is £1,000) to show that you’re managing your money responsibly and are not relying on credit too much.

This is called low credit utilisation and it has a big impact on your credit score.

‍Loqbox Grow is all about low credit utilisation. We’ll give you a credit limit that will show on your credit report and your simple £2.50 a week Loqbox membership payments are charged against it.

These payments are then reported to Experian, Equifax and TransUnion (those companies that create your credit scores, wink wink). It’s a simple way to make a big impact on your credit scores. 
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Improvements to your credit score are not guaranteed.

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Missed Payments

We are all human. Life isn’t always easy, the unforeseen happens, and occasionally payments get missed. 

But this can have a damaging effect on your creditworthiness (how likely are you to be accepted for credit).

The first step to preventing defaults and County Court Judgments from happening is understanding how important it is to not miss your payments, to begin with. It can be harmful to your credit score and leave a bruise on your file that could take six years to heal. 

Missing a payment for your mobile phone bill might not seem as serious as missing a mortgage repayment, but it all matters to lenders looking at your credit report. 
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‍Remember: The goal is to show, over time, how reliable you are at paying back what you’ve agreed to borrow.

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Net & Gross Profits

Two terms you’ll likely hear when discussing economics are gross and net. 

Let’s say you sell your once-beloved vintage shoes online, seeing as they’re gathering dust in the cupboard. You sell them for £100, hooray — that’s your Gross Profit (not gross at all, lovely in fact). 

‍The gross is the total profit before deducting any fees or other costs.

If it costs you £15 in total to ship the shoes to the buyer and pay any applicable fees to the online platform you used to sell them. That leaves your take-home profit (Net Profit) at £85. 

‍The net profit is what you’re left with after paying fees and costs — think of this as your profit falling through a fishing net, some smaller fishes (fees, etc.) might slip through the holes, but you’ll be left with a bulk profit (which hopefully looks more desirable than an old wet boot).

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Overdrafts

Authorised overdrafts (pre-agreed with the bank) are not all that bad for our credit scores – as long as you pay off what you owe promptly.

However, causing regular unauthorised overdrafts (when you don’t have enough money in your account so the bank covers you temporarily) could drop your credit scores and make you appear unattractive to lenders. They want to know you can manage your money well, right? 

If this is happening regularly, look at your budgeting and list your Direct Debit and standing order dates to make a plan of preventative action.

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Payment History

It takes time, patience, and persistence to build your credit score, and we’re here to cheer you on with your progress.

Payment histories are historical, meaning plenty of time needs to pass whilst showing you can consistently meet payments.

That’s why we spread Loqbox Save out over a year. Loqbox Rent payments are reported after six months of your rent evidence. And your Loqbox Grow will be continually reporting for as long as you need.

This is not a sprint, it’s a marathon — and we’re here to help you.

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Quick Credit Building

No matter how many promises are made by the various companies out there, there is no magic wand to drastically improve your credit score overnight. 

The only real way is by taking time to show you are responsible with handling credit and building a long credit history to prove it.

‍Loqbox has some seriously excellent credit-building tools to help, but seeing as it takes a while, we also care about making sure you can enjoy a happier, healthier relationship with money along the way. We’ll do all we can to help you stay motivated and on track throughout your credit-building journey.

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Register to Vote

What does voting have to do with our credit scores? Well, a lot actually. 

‍Registering to vote at your current address may significantly improve your credit score.

Regardless of whether you choose to cast your ballot on election day, being on the electoral roll looks good to the credit reference agencies (they can verify your address more easily and reduce the chance of fraud).

And yes, you can opt out of the ‘open register’ to help avoid marketing materials through your letterbox.

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Savings

There are so many reasons to feel stressed about money.

Not earning enough. Worrying about job security. Outgoings higher than incomings. Or just feeling like you're falling behind everyone else in life *squints suspiciously at social media*. 

If you’ve already signed up to Loqbox Save then you likely know how great it will feel to cash out a lump sum at the end of the year. Not to mention the credit score benefits. 

‍Remember though, if you are struggling to meet your payment agreement with us, get in touch! Better to cancel with us than miss a payment and damage your hard work at improving your credit score.

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Thin Files

This is how banks and financial institutions refer to people who have little to zero credit history. 

That’s not to say you aren’t good with your finances. But if you haven’t been building credit over time, then your track record or file will look a bit empty or “thin”.

If this is playing on your mind though, there are simple ways to start building up your credit history — like getting Loqbox Grow for a quick and easy way to start building up your credit history.

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Unexpected Costs

An expensive household appliance breaking down. Your phone’s screen cracking. Your pet needs emergency treatment. Life happens!

We know that the lump sum savings you’re building with Loqbox Save will feel like a safety net at the end of the year. That sense of achievement is part of the reason why we love what we do. 

But we also know a hard-earned savings pot may be reserved for something a bit more… fun. Nobody wants to have to dip into their holiday, wedding, or house deposit fund if they can avoid it. Which is why we recommend you consider insurance for life’s more predictable mishaps.

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VAT (short for Value Added Tax)

This is the tax added on to the goods and products we buy. 

When you see the Chancellor of the Exchequer posing with the little red box outside 11 Downing Street, the yearly budget for the UK’s economy is inside. And part of that budget includes what the VAT rates will be for the next 12 months.

‍Gov.uk displayed these rates in June 2023:

• 20% VAT (Standard Rate) for most goods and services.
  
  
• 5% VAT (Reduced Rate) for items like children’s car seats, or energy services like our gas and electric.
  
  
• 0% VAT (Zero Rate) for things like sanitary products, books and children’s clothing.
  
  

Exemptions are in place for certain items and services, for example when buying property, bank transactions, admission fees for art galleries or the zoo, and appointments with the dentist or optician.

We

As in all of us are in this together. Ask your closest friends and you’ll likely find that a huge proportion of us feel that we lack financial literacy. Or that we missed some important life lessons when it comes to money. 

All that time in school learning about algebra instead of savings, managing debt, and investments. 

Were our families tight-lipped on the subject because they want us to learn the hard way? Or did they not get taught any of this either?

Money is one of society’s taboo subjects. But is that because we just don’t talk about it enough? We think it’s time to get the conversation started.

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X (Exes)

Okay, we’re cheating with the abbreviation a little, but did you know that the people who we are financially tied to can affect our credit scores?

It sucks,  but on top of the heartbreak,  breaking up can have consequences on your finances. Particularly if the other half was not great at handling money.

If you do have joint accounts or bills, be sure to promptly disassociate yourselves if the worst does happen.

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YOU are in control

Money can be a really scary subject for many of us. Especially when we are not feeling in control of our finances. 

Becoming financially savvy is the first step in taking control of your funds and your fears, so congrats to you for making it towards the end of our A-Z.

If it’s left you hungry for more though, we have a plateful of information, help and guidance — check out Loqbox Coach if you haven’t already.

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Zero Percent Interest

Some lenders offer 0% interest for a fixed-term time period. That means you don’t pay any interest on what you’re borrowing during that time window. 
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With our Loqbox credit-building tools, we charge 0% interest on your credit agreements. Zilch, nada, nothing for the year.

Full Loqbox membership costs £2.50 a week, which covers your credit-building journey with Loqbox Grow, Loqbox Save and Loqbox Rent. Use all three for the best possible results.

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Improvements to your credit score are not guaranteed.