A bad credit rating can affect all of us.

Maybe you’ve applied for a loan and been rejected.
Maybe you’ve researched your credit rating out of curiosity and discovered your rating is ‘poor’.
Or perhaps you’ve faced financial problems in the past and are wondering how this will affect your ability to get credit.

Whatever your situation, a bad credit rating is never a pleasant situation. Let’s take a look at what it means in general and what it can mean for you specifically.

What is your credit score?

Your credit score is a number which expresses how likely you are to pay back your debt in full and in time.

Your credit score is extracted from the far more comprehensive credit report. The report offers a detailed look at your financial strengths and weaknesses.

Your credit score condenses the information-packed history into a single number.

This definition also makes it clear why the credit score, as a tool for lenders, is equally revered and reviled. On the one hand, it is extremely useful. On the other, it is obviously an over-simplification of a complex situation.

Who decides if your credit score is bad or good?

Credit rating agencies do. These are vast, usually multinational corporations collecting huge amounts of data on millions of individuals like you.

In the UK, there are three rating agencies: Experian, Equifax and TransUnion.

Whenever a bank or financial institution offers you a loan, they report this to one or several of these agencies. Whenever you fail to make a payment, they’ll do the same.

Over time, your behaviour creates a profile. This profile tells future lenders how much you can be trusted to pay back their money. When you apply for a loan, the potential lender requests your score from one of these agencies to support their decision.

What’s a good and what’s a bad credit score?

Although all credit rating agencies roughly use the same information, their scores can nonetheless turn out to be quite different. The reason is that they all use their own, proprietary algorithm.

Let’s take a look at what they consider a good credit score. To qualify as a good borrower, you need to get …

• a score of 700 or more with Experian
• at least 660 with Equifax
• a 3+ on the 1-5 rating scale of Noddle, the online portal of TransUnion.

A bad score, meanwhile, is defined as

• anything below 379 with Equifax
• less than 565 with TransUnion
• a score that doesn’t reach at least 720 with Experian.

Bands, not numbers

It is quite understandable to look at these numbers as the most important signifiers of your creditworthiness. However, ultimately, your exact credit score doesn’t actually mean that much.

How so?

For one, lenders will not base their decision solely on a bad credit score. Rather, they will juxtapose it with other aspects. These include your borrowing behaviour over the past few months or your disposable income or the way you’ve handled your finances recently.

Secondly, many lenders will only look at the band your score’s in.

To give you an example, any score from 0-379 is considered poor or very poor with Equifax. If you have exactly 379 points, your chances of getting a credit are bad. At 380, however, you’re ‘fair’ and can suddenly get your hopes up.

Things become even more ridiculous at the junction between ‘fair’ and ‘good’. A fair rating will give you a 50% chance of success. A ‘good’ rating, however, means almost certain acceptance.

Making the most of it.

This does put into question the entire rating system. But it also offers an incredible opportunity: Improve your credit score just a little bit and you suddenly seem like a reliable partner for the banks.

How to do this? The following two steps are your best opportunities:

• Get a credit building card. This card is for those with a bad credit rating. Close all other cards you may own and pay off your debt. Then, use the credit building card to make regular purchases and always pay them back in time. This creates an impression of stability which can go a long way towards rebuilding your credit.
• Pay attention to your credit utilisation rate: Lenders always take a close look at how much of your potential credit you are using up each month. To them, the mere fact that you are taking on a lot of financial responsibility is a sign of danger. Try not to exceed a rate of 30% and try never to miss a payment – a single missed payment can remain on your report for up to six years!