What are the magic numbers when it comes to borrowing?
Your credit score is based on your credit history. This incorporates financial information, such as how much credit you have and whether you’ve made payments on time. Credit reference agencies compile credit scores to give borrowers an idea of where they stand on the scale of credit ratings and how likely it is that a lender will extend them a line of credit when they need to borrow money. A bad credit score can make getting credit problematic and is an indication that you may need to take steps to improve your credit score, otherwise you only options will be loans for people with bad credit.
What counts as a bad credit score?
Each of the credit reference agencies has their own scoring system so what counts as a bad credit score with one agency may not be with another. It’s also important to remember that lenders will use information from a credit file to make credit scoring decisions of their own. However, lenders don’t actually use the credit scores that agencies compile – so, even if you have a low credit score with an agency this may not necessarily prevent you getting credit. The three main agencies define a bad credit score like this:
- Experian – this agency scores between 0 and 999. A credit score of 0-560 is considered “very poor” while 561-720 is “poor” and 721-880 is “fair.”
- Callcredit – the scale used by Callcredit is 1 – 5 with 5 being the top score. Credit rating 1 and 2 are considered “poor” by this agency but you may still have problems getting credit even if you fall into Credit rating 3.
- Equifax – with scores out of 700, Equifax rates 0-279 as “very poor,” 280-379 as “poor” and 380-419 as “fair.”
What factors make a “bad” credit score
If you’ve checked your credit score with one of these agencies and found that you fall into one of the lower categories then there could be a number of reasons for this.
- Missed or late payments. If you haven’t managed existing credit very well and you have a history of missing payments or making them late this could impact on your credit score.
- Too much credit. If you have a lot of credit and you haven’t reduced your total borrowings in a while this could also bring your credit score down.
- Making a lot of credit applications at the same time. Many agencies and lenders view a flurry of credit applications as an indication that you’re not able to manage your finances so if you have made a lot of applications in one go then you could see your credit score drop.
- Legal action against you for unpaid debt. Your credit score will suffer if you have been unable to repay past debt and action has been taken against you as a result.
- Associated credit files. If your credit file is still linked to a former partner – or housemate – who doesn’t have a great credit score then this could have an impact on your own credit rating.