How Important is Your Credit Rating?

How Important is Your Credit Rating?

by Les Roberts on 23 Aug, 2011

Why your credit score matters

Most of us have some form of credit, whether that’s in the form of personal loans or credit cards from your bank, car loans from a local dealership, department store-cards or a home loan.

Even if you have no form of financial loan, you’re very likely to have some kind of service or product that requires a credit rating. For example, household utilities often require a credit check as part of any application, as do mobile phone contracts and catalogue shopping accounts.

Sometimes customers don’t even realise that their credit rating is being assessed when they buy a new product, but it’s very likely that your credit rating has been checked fairly recently by a financial instituion of some kind.

But why is there so much focus on having a good credit rating and how exactly does it benefit your finances to have one?

Basically, your credit rating is a picture of your financial risk profile to new lenders. It shows every financial credit product you’ve taken out in your lifetime, along with relevant information about your address, position on electoral register and past payment history.

Your credit record will show if you’ve paid your bills promptly in the past, or whether there have been gaps or delays in your payment history and other other signs of adverse credit or defaults, such as CCJs or bankruptcy.

This record is held by several large credit reference agencies, primarily Equifax and Experian and they use it to assign a rating. This isn’t in the form of a number necessarily, but it will give new lenders an idea of your value and reliability as a customer.

Essentially, if you’ve paid your bills fully and on time in the past – showing your ability to handle credit effectively, it’s more likely that you’ll be accepted for new competitive financial products and credit.

If you’ve defaulted on payments in the past, moved house many times (making you more difficult to track down), or have a history of poor credit management, you are unlikely to be accepted for competitive new products and be offered adverse credit products at best.

In some lines of work, having a poor or adverse credit record can even preclude you from certain jobs and professional occupations – particularly those involving money handling or financial decision making or company incorporation.

If you are unsure about your credit score and you are looking to take on further credit then worth getting a copy of your credit record before you apply as getting turned down for credit can have a negative affect on your score. You can get a copy of your credit file from Experian or Equifax online and, although they offer free credit socring, it is worth paying the extra to get a full copy of your credit report as you can then identify any errors and have it ameneded.

It’s actually worth getting an updated copy of your record each year to review as you can monitor progress and track any errors quickly, before any problems mount up and impair your ability to take out credit.

If you find that you have a poor credit score through having a short credit history, then you can improve your record over time. A good way to do this is to open a bank account that comes with a debit card, take on a mobile phone contract or take out a prepaid card that you can use instead of a credit card as all of these things will show lenders that you have the ability to handle credit well.
Pay on time and without fail. If you know you can’t meet a payment, contact the lender in advance and agree an alternative. Show that you’re responsible and engaged with your finances.

However, rebuilding your credit rating is much more difficult if you’ve been made bankrupt or have gone through a debt management scheme and you should seek advice from a debt charity about rebuilding your credit if this is the case. In time, your old liabilities will ‘fall off’ the record and you can present a more reliable picture to future lenders.

Article written by Les Roberts, writer at Compare a variety of financial products including loans and credit cards with moneysupermarket

About the Author

Les Roberts

Les Roberts has been a freelance journalist for over ten years specialising in lifestyle, football, music, fashion and art. He also works for, the UK's leading comparison website as a video and content writer. Follow Les on Twitter @LesRobertsMSM