Magic number credit score?

So in an ideal world your credit score would be excellent and you would have access to the best mortgage deals and lowest unsecured loan rates on offer. But what is that magic number and how many of us actually achieve it?

According to Experian, the UKs biggest credit reference agency, a credit score of 961 or above puts you in the “excellent” category.  Any score between 881-960 is still a good score and means you would be eligible for most credit cards, unsecured loans and mortgages, although not necessarily given the best deal that the lender has to offer. At the other end of the scale, drop below 560 and you are considered as very high risk and in financial difficulties.

It’s always been somewhat of an unknown area, where the credit agencies have dictated things for a long time. Only being contacted if someone had been turned down for a financial product and they wanted to know why, even then it was difficult to get a straight answer. But are things changing, are we starting to realise the importance of our credit score and good maintenance of it?

Barclaycard have somewhat revolutionised the way their customers view financial data. In partnership with Experian they are now offering all of their 10.5 million customers, regular and more importantly, free online access to their credit score. For most it will be the first time they get to see what and how their financial data is used, and the impact that this has on their lives.

Experian claim that the majority of people are average and fall into a fair range from 721-880. However, the lower your credit score the higher the risk you are considered, thus the higher the interest will be. So how important is this data when a lender is considering your application? Contrary to popular belief, credit reference agencies do not make the decision on whether or not you get the credit, it is the decision of the lender. Furthermore, decisions are often not based just on a credit score, but will take other things into consideration such as any previous dealings or relationships you may have had with that lender.

Perhaps it is more accurate to say that the data held by the credit reference agencies has more of an impact on the product and deal you will be offered, especially if you are a new customer.

According to Moneyfacts, someone with a “good” credit record can obtain loans from M&S Bank for just 3.5%, but once their credit score is classified as “fair”, which according to Experian is the average person in the UK that jumps to 31.9%.

So how are we scored and how does what we do impact upon our credit score?

Unfortunately each of the three credit reference agencies in the UK all adopts a unique scoring method, which makes it difficult to compare them directly. They all provide you with a number, but this may mean different things depending on which agency you are looking at. However they will all provide a five band scale from “very poor” to “excellent”

Equifax for example says its range is from 0-600 roughly, and advises its customers to “worry less about the number and more about the band you’re in. We focus on the bands in our communications”.

CallCredit scoring is completely different, and ranges from 20-750 with a very complex system. A score of 500 for example, arguably isn’t that great because it represents a ratio of 1:1. In other words, for every two people with this score that a lender takes on, one is likely to turn out to be a “good” customer and one is likely to turn out “bad”, so may miss payments. However, a score of 600 represents a ratio of 32:1, so 32 “good” customers for every “bad” one.

Obviously paying your bills on time will maintain, if it’s already high, or increase a credit score. Miss a payment however and it all starts to look negative. “There are three main reasons why people get poor scores,” says Experian’s James Jones. “They might not have a history because they have just turned 18 or have just arrived in the country. Secondly, they might have a history of bad debts, missed payments etc., or even a bankruptcy. The third group tend to be the over-committed, those with lots of outstanding loans they are juggling.”

Mr Jones also says that lenders are most interested in what a person has been doing over the past three to six months, and then for the past two years prior to this, although credit reports go as far back as six years.

In the US, a person’s credit score has long been common knowledge and there is even a dating website called CreditScoreDating (“Where good credit is sexy!”), dedicated to helping singles find someone with a similarly great, or not so great! financial view of the world. So if all else fails in obtaining the ultimate financial product you may just get what you want in the dating world!