What is a credit score? Why does it matter?

What is a credit score? And why it matters for mortgages

A credit score is a number (0-999 for Experian, up to 700 for Equifax, and 710 for TransUnion) that determines how ‘credit worthy’ you are as an individual. The higher the score, the more lenders will view you as a safe borrower and vice versa. Credit scores are used by a many different institutions as a way of assessing risk, including lenders, insurance providers, landlords, and sometimes even employers. While there are many credit agencies throughout the U.K., the top 3 agencies (Experian, Equifax and TransUnion) process a large majority of volume.

How are credit scores calculated?

Fundamentally, your score is based on your credit history. An individual’s credit history is a track record of their ability to repay debts and their responsibility in servicing their various obligations (such as paying your utility bills on time). Your history also logs any adverse credit-related judgements made against you as well such as CCJs (‘County Court Judgements’ which are made in the case of unpaid debts), IVAs (Individual Voluntary Arrangements, an agreement made to repay debt to all credits when you are in financial distress), and bankruptcies, all of which can inhibit your score for a significant period.

Examples of someone with a ‘Good’ credit history is typically an individual who:

1. Pays their debt obligations and their bills on time - consistency is key and settling obligations in a structured and reliable manner reflects well in your score
2. Is registered on the electoral roll at their current address, which helps confirm their identity to a credit agency
3. Has a steady history of using credit related products
4. Doesn’t overuse credit. In other words, keeps the utilisation of their overall credit limits relatively low (Experian’s rule of thumb advises a utilisation of less than 25% of your total limit)

There is no golden rule in terms of what is considered a ‘good’ credit score as these scores are traditionally accompanied with a full report which companies use to assess individuals along with other internal metrics they may have, however the top 3 agencies have their own ranges and definitions, which give a sense as to which scores are considered ‘good’:

• Experian: 881 - 960
• Equifax: 380 - 419
• TransUnion: 604 - 627

How do credit scores affect mortgages?

While there isn’t a golden rule for what credit score makes you mortgage-eligible, it forms a part of a more holistic assessment of you as a borrower. The scores can also impact how expensive a mortgage will be, or in other words what the interest rate will be.

Below we give an example as to how they work and highlight why they are not a perfect metric.

An illustrative example

Take Jane Smith, Jane has a 999-credit score from Experian and is looking to get a mortgage. Her friend Joe Bloggs has a 799-credit score from Experian and is also looking to buy their home via a mortgage. Assuming both parties have the exact same income, job, and demographic features (age, employment history, education level, etc.) a mortgage provider here will deem Joe a higher credit risk, and likely be more hesitant to lend as much to Joe as to Jane. In order to compensate for the higher level of perceived risk that Joe poses as a borrower, the mortgage provider could charge a higher rate.

Credit scores are not always reflective of an individual’s risk profile. Critical to having a good credit history is using credit. In our previous example, one of the reasons Jane’s credit score is higher may be her history of making purchases on a credit card and making payments on time, while Joe’s score is lower because he doesn’t use credit. If that’s the case, scores don’t necessarily reflect the true risk of an individual, but rather the lack of information credit bureaus have on Joe.

How does Jrny look at scores?

At Jrny, we like to take a different approach to credit scores, in fact our entire proposition is set up to help people who we believe are indeed credit worthy, but are inhibited by the archaic credit scoring system.

We help customers who have a limited credit file, build their score by having your monthly rent count towards your credit score (which it typically does not, with a standard rental). This will help you find more favourable mortgage deals when you exercise the option to buy the house. Contact us at @ info@joinjrny.com to find out more.