Understanding credit scores
Credit scores are an impact factor in determining an individual’s credit worthiness.
When an individual applies for a loan, such as a mortgage or car loan, a credit provider will use a credit score to help them decide whether to lend the money, the amount to lend and the interest rate.
An individual’s credit score is calculated using the individual’s personal details; the type of credit providers used and amount of credit borrowed; any unpaid debts; the number of credit applications made and considers any debt or personal insolvency agreements relating to bankruptcy.
A credit score is rated on a five-point scale:
- Excellent: highly unlikely to have any adverse events harming your credit score within the next 12 months
- Very good: unlikely to have an adverse event in the next 12 months
- Good: less likely to experience an adverse event in the next year
- Average: likely to experience an adverse event in the next year
- Below average: more likely to have an adverse event in the next year
To prevent a negative credit score, individuals should try to spread applications over a larger amount of time; lower credit card limits; ensure their credit card is paid in full each month; and pay their rent, utilities and other loans on time.