Tuesday, 24 November 2020

Understanding credit scores | TSB Bank

Understanding credit scores | TSB Bank
24 Aug
5:37

‘Credit scores’ are used by banks to help them decide whether or not to lend money to someone They’re usually a number between one and a thousand Whether you realise it or not, everyone including you, who’s ever had a bank account, paid an energy bill or even had a mobile phone contract will almost certainly have a credit score

Credit scores are generated by organisations called ‘credit reference agencies’, who calculate scores using information contained in people’s ‘credit files’ A credit file is a record of someone’s borrowing activity, alongside information like whether they have paid household bills promptly and whether they are on the electoral roll If someone has a good credit score then it will be easier to borrow money If they have a bad score then it will probably be harder and more expensive A good credit score depends on a variety of different things

First, banks want to know that you’re who you say you are Which is why they check your details on the electoral roll Once they know who you are, they want to know whether you will be a responsible borrower They’ll know that if they can see that you’ve borrowed in the past, have paid money back in full and on time, and haven’t defaulted on payments Actively avoiding borrowing all together means the banks can’t judge what sort of borrower you might be, so it doesn’t help your score

Banks will also see you as being reliable if they see you have a history of always making prompt repayments on loans, other debts and energy bills That includes credit cards But how people use their credit card may make a difference too To banks, using credit cards to take money out of cash machines can be a sign of someone who spends more than they can afford It's also worth knowing that if you are financially associated with someone else, whether by sharing a bank account or a mortgage with them, then their credit score can be linked to yours

So, if you’re associated with someone with a good credit score, banks might be more likely to want to lend to you, but if you’re linked to someone with a bad score you could be viewedas a higher risk Finally, whilst shopping around for things might ordinarily be sensible, when it comes to things like loans, making lots of applications can damage your credit score When you make an application, most banks perform something called a ‘hard credit check’, which can leave a mark on your credit file If there are too many marks it can look like you’re being rejected by lenders, or are trying to borrow more than you can afford A way to avoid this is to get quotes from a bank like TSB which offers ‘soft credit checks’

These checks leave marks that can only be seen by you and TSB, but not other lenders Credit scores are a fact of life, but understanding why they exist and how you can improve yours can help when it comes to borrowing money in the future

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