Only two per cent of people aged 30 years or younger have an ‘excellent’ credit score – and I, as it turns out, am not in the two per cent.
I shouldn’t be surprised by my less-than-impressive result. Until last year, all I knew about credit scores was that I needed one. I couldn’t tell you why I needed one, how to get one, or what one was, but I knew that a credit score was Necessary with a capital N.
It wasn’t until I changed my phone contract for the first time in ten years that I realised I already had a credit score (at least three as it turns out) and that I should probably try to wrap my head around some of the jargon, face the joyless archives online full of (mis)information, and level up my twenty-something life with some more adult points.
Turns out my deep dive required more than a cursory google search. There’s quite a lot of confusion around credit scores – even from some of the UK’s top personal finance writers. It almost seems like the system is deliberately obfuscating around the issue – like the people coming up with this stuff actually want to confuse, bamboozle, confound, and mystify us regarding the very concept of credit.
So here we go: the top 8 things every twenty-something and older should know about this monster called credit.
What is a credit score?
Simply put: a credit score is a number used to represent the likelihood of you repaying monies you have borrowed. It’s about trying to predict your future behaviour, figuring out if you’re someone financially trustworthy.
In principle, this means if you’re good at “meeting your commitments” (ie. paying back your overdraft, credit card, or loan each month) then your score should be higher than someone who frequently misses payments on their various loans.
What is a credit score for?
As an indicator of behaviour (and risk), credit scores are more for lenders than for borrowers.
They’re meant to help with decisions like whether you should have a lower or higher interest rate on your borrowing – say if you’re planning on getting a mortgage. They’re also now used by insurance, utility, and phone companies offering mobile contracts. Because that seems entirely necessary.
The higher your score, the more likely you are to be given better deals (or any deal) because you’re seen as a more trusted borrower.
However, it’s important to note that your score is not the be and end all of your ability to get credit.
Responsible lenders will also be looking at what you can afford to borrow (based on your income and any other commitments like mortgages, for example). This is why you may have the same score as someone else but get a different offer from the same lender.