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What is a credit score, and how does it work?

Someone in the finance industry mentioned the phrase ‘Credit Score’ about 20 years ago, and most of the country has been obsessed with it since.

Credit scores are a points based system that usually go from 0-600 or 0-999, the higher the number, the better credit risk you are, and that number is based on factors such as whether you have had credit in the past and paid it, whether you are on the voters roll, and whether you have got any current active credit profiles etc, etc.

Let’s put it this way, you could have little or no credit, and a score of 450 (based on a score card that goes to 999), equally, you could have lots of credit and have a score of 450. The point here is that it isn’t a yes or no system. You might have paid everything you have, but as a result of not having much, such as just a current account and a mobile contract, you could be perceived to be a poor risk. Equally, you could have a mortgage, a credit card, but also an old default for a phone, and be perceived to be good risk.

There is no such thing as bad credit really, because you are not one side or the other of the good or bad credit fence, you are almost always somewhere in between.

Can I get finance, the short answer

The short answer is you probably can. The way lenders work is that they will adjust the rate you are charged in relation to how the lender perceives your risk. If you are a Commander in the Armed Forces, have a mortgage that is nearly paid, are on the voters roll, and all your credit is good, then you should expect a very low rate of finance, and you will pay very little in interest. If you have had issues with credit agreements in the past, made late payments, used payday loans, and are not on the voters roll, this doesn’t mean you can’t get credit because you have ‘Bad Credit’ but it does mean you are likely to pay more for the finance you get because you present a greater risk to the lender so they will want a greater return to mitigate this risk.

There will also be situations where the history and score of a customer is so poor, and the perceived likeliness of a creditor actually getting their money back is so slim, that no lender will take on the risk, so in some circumstances ‘Bad Credit’ does mean you can’t borrow any money, but these are fewer than you might think.

The question to ask yourself

For the vast majority of people, it is a simpler question. Can you really afford the repayments?
If the answer is yes, and you have money in the bank at the end of the month, regardless of your ‘Credit Score’ or whether you think you have ‘Bad Credit’, there probably is a lender out there that will take on that risk, provided you can prove that you can afford the repayments. It isn’t an exact science, and sometimes we see people we think should be ok and are declined, but equally, many of the people who think they can’t get finance because they have the buzz words ‘Bad Credit’ are often surprised that they actually can get finance, and also surprised that it isn’t as expensive as they thought it might be.