Credit Score And How It Impacts Your Quality Of Life
A credit score UK is a numerical result and a mathematical analysis of consumer’s credit history, as laid down by a credit bureau. This score represents the ability and reliability of a customer to repay the loan(s) to his bank. It forms the critical basis of a financial document known as ‘credit report’ generated by credit bureaus.
There are different credit bureaus in the UK, and each credit bureau is unique in its methodology of consumer credit profiling. At any given time, a consumer will have different credit scores as computed by different credit bureaus.
Banks rely on the credit reports generated by credit bureaus to assess the creditworthiness of potential loan applicants. It is essentially a manner to determine your capacity to repay a loan that the bank may consider sanctioning to you.
Credit bureaus collect personal details and history of financial transactions for computerized analysis and generate credit reports on request. These credit reports are sought by banks to assess and make decisions before disbursing loans to consumers. Therefore, high credit scores indicate a healthy and positive trend on the credit report, while low credit scores indicate the presence of a negative outlook.
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What Does A Credit Report Include?
A credit report includes:
- personal information such as name, age, residential address, occupation, office address, employment history, etc
- details of past and existing loans, a record of bankruptcies (if any), credit inquiries, and a list of entities that have accessed the report, etc.
Why Are Credit Reports Important?
Monitoring credit reports at periodical intervals should always be a priority and responsibility for individuals, businesses, and corporates. Checking into a credit report on a timely basis helps to eliminate factual inaccuracies. It is also a good idea to check reports quite often if the need to improve credit score is a priority.
Firstly, at an individual level, it helps to monitor spending and decide on plans to avail credit when required. Secondly, monitoring credit score and creditworthiness does impact many aspects of routine living, e.g., rent an apartment, buy a house or car, need an urgent loan, or maybe get hired for a job, etc. All these essential life decisions are based on your credit score.
Having a good credit UK rating is an absolute necessity in the current scenario. It is important to have a credit report with no faults or systemic errors so that the sustenance of survival and living is net with ease. The lack of good credit rating poses greater hardships because it is linked to all manner of compliance databases.
Factors That Determine A Credit Score
1. Payment History:
Timely payment of bills has a positive effect on the credit score to a large extent. If there are recorded issues viz., charge offs, missed payments, bankruptcy, etc., then it would adversely affect credit score.
2. The volume of debt:
Having high balances can have a drastic effect on the credit score. However, the credit score can be improved quickly if the balances are paid off at the earliest.
3. Credit History:
When the age of credit is considerably tenured, it has a beneficial effect on the credit score. It indicates experience and maturity in dealing with the credit. Whereas, opening and closing of new credit accounts could lower the age of credit, which indicates a certain kind of inconsistency in managing credit.
4. Types of Credit Accounts:
A credit report reveals two types of credit accounts- revolving accounts and instalment loans. Having a combination of these accounts on the credit report would be better for credit score.
It is better to hold a mix of loan assets, such as a car or mortgage loan, in addition to a credit card or personal loan. Such types of credit would probably account for 10% of credit score. So, having an instalment loan won’t be a burden on the credit score.
5. The number of Credit Inquiries:
This aspect of credit inquiries needs to be understood very well. Not many people are aware of what it means.
Every time an application is made for either a loan, credit card, or as an employment process check, an automated inquiry is placed on the credit report. An inquiry indicates that it is a credit application. Credit inquiries generated, constitute 10% of the total credit score.
It is alright to have a couple of inquiries, but several inquiries can knock off several points, impacting the total score. So, it is best to keep those inquiries at bay.
It is also heartening to note that only those inquiries made within the last financial year, would factor into the credit score. It is also a matter of relief that inquiries are automatically erased after 24 months. An important point to note, checking into a credit report is considered as a “soft inquiry”, and does not impact the credit score.
A credit report is not a mere financial report or a statement of transactional history. There is plenty of effort that goes into the making of a credit report. In other words, it is a mathematical and algorithmic skill to present a near accurate picture of consumer financial behaviour.
A credit report is so accurate that financial institutions, realtors, insurance agencies, landlords, and employers depend on the predictability to make their assessments. So, every individual must make it a personal responsibility to monitor and check into his/her credit report, periodically at least once or twice a year. The importance of a credit report is such that it has become the very basis for reference checks and validation by employers, banks, landlords, etc.
The margin of error in credit reports is barely less than five per cent on an average. However, it remains a personal responsibility of the individual to have those errors (if any) corrected at the earliest.
A credit report with a healthy score is so important that the lack of it can affect the health and well being of individuals/ families. Due care must be taken to ensure financial responsibility at a personal, professional, social, and emotional level.