7 truths about your credit score

The world of money often feels clouded by myths and misconceptions. For too long, jargon and abbreviations have left people in the dark. Here, we shine a light on the often misunderstood area of credit scores.

Your credit score is a measure of how well you handle debt

Contrary to popular belief, your credit score has nothing to do with how rich you are. A credit score is a three digit number that enables lenders to assess your likelihood or ability to repay the debt.

There are three UK credit reference agencies – Experian, Equifax and TransUnion – who compile information from the electoral roll, court records, credit cards, loans, mortgages, bank accounts, energy and mobile phone contracts and other sources, to calculate your credit score. There is no universal credit score, or centralised list of risky borrowers. Each reference agency has its own specific credit score range. That means that an Experian score of 800 may mean something different for Equifax or TransUnion.

Credit scores aren’t just for mortgage applications

Many people don’t think about their credit score until they need to do a mortgage application. But the earlier you look into it, the better. When you have a high credit score, you may be offered better rates for credit cards, loans, insurance and that all important mortgage, if you’re at that stage.

Having no credit history can be just as bad for your credit score as being late with payments. If you have no credit card, your credit score may be quite low because the banks don’t have enough information about how you handle debt.

You need to ensure you have a good mix of credit. This could mean taking out a credit card, or keeping old credit cards open, which will boost your score, even if they have zero balance. That said, check your eligibility for taking out credit with an online tool before you apply, and try not to make too many applications within a short period of time. If you’re rejected or make too many credit applications, your score could be negatively impacted.

You can find out your credit score for free

Another common credit score myth is that checking your credit score will lower it. It won’t. And it’s free to look up using digital tools such as ClearScore and Credit Karma. These services can also give you tips on how to improve your credit score, such as registering on the electoral role or making fewer credit applications.

Not all kinds of credit checks affect your credit score

There are two kinds of credit checks, a hard credit check and soft credit check. Soft credit checks have no impact on your credit score and they can’t be seen by companies. A soft check is when, for example, you check your own credit or a company searches your report to check on identity.

When you apply for credit, that’s when a hard credit search is done, completed by a lender. A hard credit check will be visible to other lenders and may lower your credit score, especially if your application is rejected.

Setting up a joint account links your two credit files

Say you’ve applied for a Starling Bank account. We’ve done our soft credit search - no impact on your credit score - and your account has been approved. You start using it and decide that you also want to use Starling to manage your money with your partner by opening a joint account. You can do this directly from the app as long as you both have personal accounts already and your two phones are close enough to connect. But before you do, there’s one important step: ask about each other’s credit scores.

Joint accounts link credit files together. If the person you’re opening the account with has a low credit score, yours could also be lowered by applying for a joint account with them. Talk about money before you commit.

Student loans don’t impact your credit score

Unlike other loans, if you take out student finance, the success of your application is not determined by your credit score and your student loan won’t be recorded on your credit file. That said, if you take out lots of credit or extra loans to cover your living costs while at university, your credit score could be impacted. Similarly, if you don’t pay bills on time that could lower your score. Try to get into good habits as soon as you can.

Paying rent regularly and on time can improve your credit score

For ’generation rent’ saving a deposit for a property can seem like an impossible mountain to climb. Even if you get there, you may find that your credit score isn’t high enough for a mortgage, or you may be offered a bad rate as a result of poor credit. It’s a catch 22 situation: you can up your credit score by paying your mortgage on time, but you’ll need a mortgage in the first place for that to be possible.

That’s where Starling Marketplace partner CreditLadder could come in. This government-backed scheme identifies monthly rent payments, which are then reported to a credit reference agency and added to your credit history. Provided you pay your rent regularly and on time, your credit score can improve during the years you rent. To sign up, simply go to the Starling Marketplace in the app and look for the ’Credit Scores’ category, then follow the instructions from CreditLadder.

The above article is intended as general information and does not constitute advice in any way. You should take independent legal advice if you have any questions about your specific circumstances.