Credit comes in all different shapes and sizes, including loans, mortgages, overdrafts and credit cards, but what is it and why do I need it?
What is credit?
The definition of credit is a contractual agreement in which a borrower receives something for value now and agrees to repay the lender at some date in the future, generally with interest. For example, when a consumer purchases something using a credit card, they are buying on credit – receiving the item at that time, and paying back the credit card lender by their pre-agreed time, normally monthly.
What is a credit score?
When you apply for credit, responsible lenders want to make sure you can comfortably afford to manage any new borrowing. To assess the chances that you will be able to repay what you owe, lenders calculate a credit score by weighing up various information.
To create this credit score, lenders will use information from several different sources, including your credit report which will confirm your identity as well as provide information on your past credit history, your credit application, which will show your job or income
Credit scores do not take into account gender, religion, race or ethnicity.
Different lenders will give different credit scores, taking different factors into considerations and can even score the same factors differently – for example, one lender may score a mortgage application differently to a payday loan. Just as lenders use their own formula when calculating a credit score, they also set different thresholds for accepting an application.
People with a high credit score are usually seen as a lower risk, and therefore more likely to be granted credit and potentially given better rates. One of the best ways to stay in control of your finances is to check your credit report regularly.
What is a credit report?
A credit report details your personal credit history, containing a record of your responsible repayment of debts, including loans, mortgages, credit cards and mobile phone contracts. These reports can be a vital tool for managing your finances.
Credit reports are compiled by three credit reference agencies – Callcredit, Equifax and Experian. We highly recommend that you get a report from all three, as they will each have their own methods of checking your credit score. With each statutory credit report costing £2 per credit reference agency, the minimum financial commitment is £6 a year, which in our books is very much worth it.
Why would I want to check my credit report?
Changing jobs or homes: Lenders aren’t the only people who can check your credit history. With your permission, prospective landlords and employers can see parts of your credit report, which in turn can affect your job prospects and chances of renting a home.
Applying for credit: It would make sense to review your credit report to make sure that everything is accurate and up to date before opening a new credit account. If there is an error, contact the organisation responsible with proof and arrange to get it corrected.
Protecting against ID fraud: Identity fraud is one of the fastest growing crimes of the 21st century, and monitoring your credit report can offer protection from this. Criminals steal your personal information and use it to take over existing accounts or to set up new accounts in your name. Keeping an eye on your credit report enables you to spot any suspicious entries and deal with problems quickly before they escalate.