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Your credit score is a three-digit figure that has the power to control a huge number of areas of your life – yet the realities of credit scoring remain obscured by myth, confusion, and lack of transparency. This is concerning given the power that credit scoring has, and can mean that a vital component of the overall management of your personal finances is deeply misunderstood.

In an effort to shed some light on the realities of credit scoring, below, we’ve put together a list of the most common questions people tend to ask about the practice, along with the answers you need to know. So, without further ado…

What is a credit score?

A credit score is a three-digit number that is used as a reference point for your personal financial management. Credit scoring is popular with banks and other financial institutions as it allows for a quick, at-a-glance assessment of the way you manage your finances, and has become the primary method by which applications for credit are assessed.

Who decides a credit score?

You may be surprised to learn that you do not have a definitive “credit score”; the number can vary between companies, though they will usually be fairly closely aligned. The companies that compile your credit scores are known as credit bureaus, the best-known of which are Equifax and Experian.

Credit bureaus effectively act as a third party between you and the companies you hold a financial history with. If you apply to a new lender, the lender will “ask” a bureau for your credit score, and then interpret that score based on their own criteria.

So you can have a credit score with a credit bureau you’ve never interacted with?

Yes. Credit bureaus are not financial institutions in and of themselves, and you don’t register an account with them or apply for their products. Their role is to act independently, assessing your financial affairs and then providing a quick summary of that assessment – as your credit score – when you apply to a new lender.

What information do credit bureaus hold?

• Your personal details, such as your name, phone number, and address
• Any existing debts you have
• Your existing financial products, such as bank accounts, loans, and credit cards
• Information on your utility bills, such as whether they are well-managed or in default
• Your current and past income
• A history of defaults against your account; for example, if you have missed payments on your credit card in the past, the credit bureau will know this
• Details of any financial relationships you have with companies, such as your cell phone contract
• Details of any personal relationships you have that may influence your finances, such as someone you share a home with

How is a credit score created?

The exact methodology is something of a trade secret, but credit scores are essentially formulated by assessing your income, your existing debts, and your history of financial management (such as whether you have any defaults on your file) to produce a number that is designed to be reflective of your creditworthiness.

What is a good credit score?

With credit scores, the higher the number is, the better; your score would need to be over 670 is considered to be ‘good’. The current US average credit score is 687.

What is the impact of a bad credit score?

If your credit score is ‘fair’ or lower, then you may find that you struggle to obtain financial products such as loans and credit cards. However, there are exceptions to this, and some specialist companies will offer lending to those with lower credit scores, and you shouldn’t have too many problems finding bad credit loans near you with a little searching. Similar options are available for credit cards and, to a lesser extent, mortgages, though this may depend on the amount you have available for a deposit.

Outside of the financial implications of a bad credit score, you may also find that a bad credit score influences your ability to find jobs or even rent an apartment. The use of credit scoring to assess these kinds of applications is rather dubious but is nevertheless a reality for the moment.

Can bad credit scores be improved?

Yes, to an extent.

You can improve a bad credit score via a number of different methods, but it is important to note that these methods cannot fix a bad credit score – they can just improve it from its base starting point. If your credit score is being impacted by signs of previous financial issues – such as defaults or late payments – then there is relatively little you can do to ‘fix’ the score in the short term.

So these signs stay there forever?

Thankfully not; after six years, all defaults and similar issues will be automatically removed from your credit file and will no longer be considered when calculating your score.

There are also some suggestions that defaults tend to lose their power over time, though this is unconfirmed, and may be more hearsay than anything. However, many people have found it to be true, so it’s worth knowing: a default that has been sustained in the past 12 months may impact your score more dramatically than a default sustained five years ago would.

Can I challenge my credit score?

If there is information on your credit score that is incorrect then yes, you can challenge this with the credit bureau who has recorded the inaccuracy.

However, you cannot challenge information that is correct; nor can you ask for defaults that have been fairly applied to be removed. Credit scoring is used by companies as a way of protecting themselves when lending; as a result, there is a huge onus on credit bureaus to provide a genuine representation of your financial management, so there’s no way to persuade a bureau to remove less-than-ideal information from your file.

In conclusion

By paying close attention to your credit score, protecting it, and – if necessary – improving it, you can be confident that a crucial element of your personal finances is well under control.