When it comes to borrowing money or applying for financial products, your credit score often plays a starring role. But what is a credit score and why does it matter so much? Let’s break it down for you – here’s our guide to what a credit score is, why it’s important and how to improve it.
So, what is a credit score?
A credit score is a number that shows how reliable you are when it comes to managing credit. It’s based on your credit history and is used by lenders to decide whether to approve things like loans, mortgages or credit cards.
Credit scores are calculated using information from your credit report. This includes your payment history, how much credit you’re using and other factors we’ll cover in a bit. Think of it like a financial health check – the higher your score, the better your options.
Why is it a big deal?
Lenders use credit scores to assess how risky it might be to lend to you. A good credit score can make it easier to borrow money, secure better interest rates and access financial products. It can also help with things like renting a flat or setting up utility accounts.
On the flip side, a low credit score can limit your choices or result in higher costs for borrowing. That’s why understanding and improving your credit score is so important.
How do credit scores work?
Credit scores are managed by credit bureaus like Equifax, Experian and TransUnion. These companies collect information about your credit activity, such as payments, balances and credit applications to build your credit report.
Each bureau calculates your score slightly differently, so your score might vary depending on which bureau is used. But don’t worry – they all look at similar factors.
What affects your credit score?
Your credit score isn’t just a random number – it’s based on key factors that reflect how you manage credit. Here are some of the factors that affect your credit score:
- Payment history: Do you pay your bills on time? Late or missed payments can lower your score.
- Credit utilisation ratio: This is the percentage of your credit limit you’re using. Keeping it low (ideally under 30%) can boost your score.
- Length of credit history: The longer you’ve had credit accounts, the better – as long as you’ve managed them well.
- Types of credit used: A mix of credit types (like credit cards, loans or mortgages) can work in your favour.
- Recent credit enquiries: Applying for lots of credit in a short time can lower your score, so only apply when you need to.
How can you improve your credit score?
Whether you’re building credit from scratch or repairing a damaged score, here are some tips to help your number rise:
- Pay on time: Set reminders or automatic payments to avoid missing due dates.
- Use credit wisely: Keep your credit utilisation low by only borrowing what you can afford to pay back.
- Check your credit report: Look for errors or inaccuracies and dispute them if needed.
- Avoid too many applications: Be selective about applying for credit to avoid too many hard enquiries.
Did you know using Zilch could help improve your score, too? With Zilch Up – our dedicated card for building credit – you can improve your financial standing by spending responsibly and paying on time. Plus, when you shop smarter with Zilch – like splitting payments with Pay over 6 weeks or earning up to 5% back with Pay now – you can manage your spending and build healthy financial habits. Good stuff.
For more detailed tips, check out our in-depth guide on improving your credit score.
Think your credit score is just a number? Think again.
Your credit score is a tool that can open doors to better financial opportunities (when managed well, of course). And if your score isn’t where you want it to be, improving it isn’t out of reach. With a bit of focus and smart planning, you can build and maintain a credit score that works in your favour.
We have plenty of handy resources to help kickstart your journey. Ready? Let’s go.