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‘Credit check’ is a phrase you may have seen or heard when trying to get a loan or signing up to buy something via a payment plan. You may not have given it much attention – unless it caused a problem.
The score these checks provide have a big impact on your life. Here’s what you need to know to show up at your best.
This article includes tips, suggestions and general information. We recommend that you always do your own research and consider getting independent tax, financial and legal advice before making any important decision.
It’s a tool used by retailers and financial institutions, like banks and credit card companies, to work out how much they believe you’ll pay back what you owe on time. In the UK, there are three main credit reference agencies: Experian, Equifax, and TransUnion. They all vary slightly in how they calculate your credit score as well as the range of numerical values they use to represent it. What’s true across the board, though, is that the higher your score, the more reliable a borrower you’re deemed to be.
The exact calculations can vary slightly from lender to lender, but the key thing to know is it’s largely based on your credit history. This comes down to a few factors, including your current credit limits and how much you owe at that time. The main influence, though, is what kind of borrower you’ve been in the past. Essentially, every time you pay via credit card, borrow from the bank (including your overdraft) or use a Buy Now Pay Later plan, that information becomes part of your credit history. If you make repayments on time and as agreed, it preserves or boosts your credit score. Late or non-payments have the opposite effect.
Currently, Buy Now Pay Later plans do not impact your credit score, but using Buy Now Pay Later and your repayment history will be visible to other companies and may impact your ability to obtain credit from other lenders and the cost of accessing other credit.
Before deciding whether to lend to you, financial institutions and companies will often request a credit report about you from an accredited agency – kind of like asking someone for a job reference. If your credit score is low due to a history of late and/or non-payments, they may choose not to give you the money or charge you higher interest rates, meaning you end up paying more. This may affect you when it comes to getting a loan, securing a mortgage, signing up for a mobile phone plan or energy contract, or doing anything that involves delayed payments.
Simple answer: be careful about the debts you take on and carefully read the repayment terms. Once you’ve signed up, do your best to pay the money back as per the original agreement. Of course, that’s not always easy, especially if you have a sudden change in financial circumstances or overstretch yourself. Check out this article for more advice about how to budget for the unexpected and avoid the risk of overspending.
There are a few other steps you can take to protect your credit rating too. Being listed on the electoral register is critical, as is making sure you show up online with an accurate and up-to-date address. Having utility bills that are paid on time and in full is also helpful. So, if you live in a house share or your partner tends to put all the bills in their name, it’s worth dividing these up between you. And finally, if you have any financial associations like a joint bank account or shared council tax profile with someone who has a poor credit history, that can negatively impact your own score.
Good question – it’s worth keeping track of your score. All three of the UK’s main credit reference agencies – Experian, Equifax and TransUnion – allow you to check your credit score for free on their websites. You’ll have to input a few details about yourself and your financial situation. It usually takes about five minutes. Make sure to check it regularly and look out for any changes.
25 October 2023