Signing up to an annual direct debit payment plan from your energy supplier is supposed to help prevent bill shock as your payments are spread equally throughout the year. But it might not work like that...
What is a credit score?
Responsible lenders want to know that you can comfortably afford to manage any new borrowing, so they calculate a credit score that helps them to assess the chances that you will be able to repay what you owe.
To do this, they take information from two main sources: your credit report and your application form. If you are an existing or past customer, they will also use their experience of how you've managed repayments in the past.
The information they use
From your application form, lenders could request data such as your salary, how long you've been in your job, whether you are a homeowner and how many dependents you have.
Key items in your credit report include your credit accounts, your repayment history, recent applications for credit, whether you have missed repayments in the past, taken out an IVA or been bankrupt - even if you are registered to vote.
Calculating a credit score
Lenders allocate a value to items from your application and credit report, using formula based on past and industry experience of other borrowers who have a similar profile and/or have taken out the same form of credit. The total is your credit score, also known as a credit rating.
Credit scores are a single number, usually between 0 and 1,000. A high score usually represents a low risk that repayments will not be made, a low score suggests a higher risk that an account will fall into default.
So, in general, a higher score makes it more likely that you'll be able to get the deals you want. A low score, on the other hand, may make it difficult for you to get credit or mean that you pay higher interest rates.
Your credit score can change
Your credit score isn't set in stone. In fact, it will be different every time you apply for credit, because every lender uses a different formula and some even use different weightings for different products, such as credit cards and loans. So you could make three applications on the same day and get three different credit scores.
Credit scores also change over time, as your circumstances change. For example, paying off a loan could result in a higher credit score, while missing several repayments could depress your credit rating.
There is no magic number
Just as lenders use their own formula when calculating a credit score, they also set different thresholds for accepting an application. These thresholds can also vary according to the type of credit you want, so you could be accepted for an electricity or mobile phone account but have a request for a car loan rejected.
Do your research before you apply. Check your credit report in advance, make sure it's current and you stand a better chance of scoring well enough to get the deal you want.
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