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.
How is it calculated?
We all start in the middle. Scores start at a mid-point that illustrates you have the potential to be both a ‘good’ or ‘bad’ borrower. It’s then up to us to prove that we’re reliable people who can manage our money. As we use our credit (through overdrafts, credit cards etc) our score builds up – providing we repay our loans on time anyway.
There is no universal credit score in the UK. Scores are typically calculated by Equifax, Experian, and Callcredit (yeah I didn’t realise there were three agencies either). And this means you also have three different credit scores from each different calculator.
These agencies calculate your score from information they get about you from your banks, phone company, mortgage companies etc. There are a multitude of factors, including things like your age, where you live, court records (looking for fun things like bankruptcies and court debt orders), and any account data regarding your financial behaviours (like whether you’re someone who pays back the full amount, the minimum, or defaults). They then sell that info to banks, phone companies, mortgage providers etc. who can then calculate their own score, or use the agency score, to decide if they want to lend to you.
Finding out your score from any of the agencies is free and relatively easy online, however – be warned – you may end up with a whole load of retargeted ads for credit cards and home insurance afterwards. Joy.
Do the searches on my credit history also affect my credit score?
To a point, yes. Whenever you apply for credit – a loan, credit card, phone contract etc – it goes into your credit history and leaves a “footprint”. However, not all footprints are created equal.
There are ‘soft’ and ‘hard’ searches on your credit history and only ‘hard’ searches actually impact your credit score.
Take Starling for instance. Before you open a current account with us we conduct a ‘soft’ search – like a background check – to get to know you better as a customer. This search is how we figure out if you’re eligible for a pre-approved overdraft with us too. However, this search will not impact your credit score in anyway unless you accept the pre-approved overdraft. If you do choose to have an overdraft with Starling, that’s when we do a ‘hard’ check, which is registered in your credit history and may influence your overall score.
In other words, a hard search is what happens when you actually apply for credit and may leave a deeper footprint in your history. Lenders are looking at how risky you are as a customer. So if you have lots and lots of hard searches in your history for, say, new credit cards, they might question just how reliable you are. Likewise, if you open lots of new bank accounts over a short period this might also impact your score, even if those searches are soft.
Soft searches do leave footprints, just much smaller ones like ‘half footprints’. And whilst they’re not used for scoring and will disappear after 24 months, lots of them in a short amount of time will add up.
Hold up, I heard social media was being used to calculate scores too? Is that true?
In the US and China, India, and some Latin American countries – yes. Using social media accounts to measure financial trustworthiness isn’t yet mainstream in the UK though. Still, it’s a pretty bleak prospect when you think about all those awkward photos you posted as a teenager getting tipsy on Smirnoff Ice.
As millennials, we’re pretty free with our data. We share everything – our brunches, our blisters, our best friend’s cousin’s baby shower photos. We’re indiscriminate about letting apps access our photos, contacts, emails and so on.
But could this data tell anyone how reliable we are as borrowers? We’re almost certainly going to find out, so it might do to be a little warier with your “I’m so poor” Facebook moans.
How do I get a good credit score?
Sadly, it’s not as simple as just paying things back on time. Almost every lender has their own criteria and will score you differently depending on what they’re looking for in a borrower.
Don’t fret though – there are many ways you can effectively work with the system to make the most of your numbers.
Money Saving Expert has some awesome advice on how you can do this – from registering to vote to checking your files annually and running credit checks before applying for new loans using ‘eligibility calculators’ (which do soft searches) that don’t show up in your credit history.
Other top tips include never failing to pay at least the minimum repayment (one unpaid library fine could hit you for years to come) and making sure to update your address as soon as you move.
Prettying yourself up before you apply for credit – especially if you’re a millennial who might one day want to shuck the Generation Rent label and buy a house or start a business – is therefore a great idea but tricky on paper because it’s all so whimsical, based on funny rules and odder requirements.
But whilst credit scores may seem kind of arbitrary – having a good score with one lender doesn’t mean you have a good score with another – a bad score will always make life harder.
These scores are ultimately meant to help us all get the credit we need.
So this is why even though my score is awesome I’m still not able to get an AmEx Black Card…?!
Yup. Having a good score doesn’t guarantee you’ll be offered the loan, overdraft, mortgage or credit card that you want.
When it comes down to it, your credit score is only part of the equation.
Your overall history is the key thing.
This is why, if you’re a newbie to the credit world, like many of us post-university, then having little or no credit history can be just as problematic as having poor credit history. You’re a relative unknown at this stage in your life, and there’s may not be enough data on you for your score to be considered reliable to lenders. Which – if you’re anything like me and you still eat Coco Pops for dinner – may be an understandable thing for them to question.
Does this mean building your credit history is integral?
It might seem counter intuitive (or positively horrifying if you’re already sitting on thousands in student loans to repay – which by the way can give your credit score the a big boost by making your payments on time) to put yourself into debt when you may not really need to, but even having a credit card with £500 that you pay off every month can help bolster your score for the future.
In the famous words of Tesco: every little helps (as long as you pay it back).