My first introduction to the mystery that is the Credit Score wasn’t through a finance or citizenship class. “You should get a credit card – it’ll really help your credit score”, was a conversation that I overheard time and time again…
What I didn’t realise was: nobody had actually taught me what a credit score was.
With this simple guide, I’ll break down the information about Credit Scores that I wish they had taught me at school.
What is a Credit Score?
By using what is called a credit report, lenders use a mathematical formula to see an overview of your credit history that is represented by a numerical score. This three digit number shows lenders how reliable you are at borrowing and repaying money (HSBC), and ultimately categorises you in terms of risk (high – low risk). The number usually ranges from around 300 – 850.
The point of the credit score is to help lenders determine your pattern in borrowing money, ultimately helping them to see whether you’ll properly manage your repayments in the future.
Why is This Relevant for Students?
Well, we all know that student fees are colossal and that the majority of students afford university costs by taking out a loan. This is probably the first loan you’ll ever take, but the good thing is that a student finance loan does not affect your credit rating.
However, as you begin to make more monthly payments to different services i.e. your phone bill – you’ll be responsible for making sure payments are made on time.
If you manage to consistently make payments on time, this will have a positive impact on your credit score. However, if payments are missed, this will impact negatively. It’s important to be aware of your financial history so that you can receive a loan or credit (if needed) in the future.
What Impacts Your Credit Score?
The question is, what should you be mindful of when it comes to impacting your credit score? There are a few things you should know that could affect you:
- Payment history – this is a very important factor when assessing your score. Ensuring you don’t miss payments will help future lenders know that you’ll pay back loans or credit on time.
- Utility bills – these include gas, water, electricity bills etc. Even though they are not loans, they can affect your credit rating if payments are missed.
- Small unpaid debts – that missed gym bill that was never paid back, or even a missed library fee that’s been left for over a year, could actually appear on your credit report.
- Credit Cards & Loans – opening a new credit card or taking a loan is a major factor that affects your score, however, you should only take out a loan or credit card when you have received proper financial advice.
- Hard Credit Checks – some credit checks show up on your credit report so it’s important to ask whether a credit check will have an impact on you before taking one.
Will My Netflix Bill Affect My Credit Score?
If you’re unsure if a particular bill will affect your record, think about whether the bill is a form of borrowing. For example, your monthly subscription to Netflix is very unlikely to affect your score because you are not borrowing anything, but are simply paying a monthly service. However, your phone bill for a contracted mobile phone ultimately means you are repaying the full cost of the phone in instalments – therefore indicating your ability to repay a certain amount of money over time.
How Can I Check and Improve My Credit Score?
You can use a range of Credit Score apps and websites to help you check and monitor your score including Experian and ClearScore. Whichever you decide to choose it totally up to you – both are free and can be downloaded on Android or iOS.
Once you are aware of your credit score, you can find ways to boost it if necessary:
- Pay some bills (in your name) – If mum and dad still pay your phone bill but you’re thinking of taking the ropes, it’s not a bad idea to put some bills under your name (broadband, phone, utility) so you can start making consistent payments.
- Correctly managing a credit card – not everyone is ready to take out a credit card, and you shouldn’t do so until you’ve done all the proper research. However, if you know that you’re able to make consistent payments, having a credit card that you pay on time can be a good way to boost your score.
- Get on the electoral roll – also known as the electoral register which lists the names of everyone registered to vote. Getting on the electoral roll can boost your score as it helps lenders confirm your name and address.
- Set up Direct Debits – to ensure you pay your bills on time, setting up a direct debit may help you not forget to miss payments.
Making Good Decisions
Many students enter the adulting world with little or no information about their credit scores or financial history, so it’s important to be armed with as much information as possible to make the best decisions in the future.
A rule of thumb is to only do things when you feel ready. Learning to manage your finances is a process and the best thing you can do for yourself is to equip yourself with the knowledge. It is always a good idea to get into the habit of seeking financial advice from your bank to help you manage your finances for your future.
Disclaimer: This article was written for information and entertainment purposes only. I’m not a financial advisor and only hope that this article will point you in the right direction to manage your own finances.