A credit score may not be the first thing that pops into many consumers minds when they are considering their financial future. For some people, it may not even be something they have ever looked into.
Credit scores, however, can have a major impact on the prospect of borrowing to buy big-ticket items such as a car or a house. They may also matter for areas such as employment possibilities, as well as obtaining consumer goods such as a mobile phone.
With that in mind, here’s why now could be the right time for all consumers to take a closer look at their credit score.
What is a credit score?
A credit score provides a snapshot of an individual’s risk level from the perspective of a lender. It focuses on past borrowings and whether a consumer represents a good credit risk with regard to future borrowings.
For example, someone who has a long history of borrowing money and paying it back on time and in full may have an excellent credit score. In contrast, someone who has a patchy track record of borrowing more than they can afford, with payments being late or not made at all, may be viewed as a riskier prospect by lenders.
Impact on obtaining credit
Having a good credit score can impact on an individual’s life in a variety of ways. Consumers with a good credit score may not only find it easier than those with a bad credit score to access credit, they may also be able to obtain preferential rates.
For example, a personal loan may be advertised at an interest rate of 3.5% per annum. This rate, though, may only be available to the majority of successful applicants.
Those who have the highest credit score may be the ones who are offered the advertised rate, since they could offer a lower-risk proposition for the lender.
As well as affecting an individual’s ability to obtain credit at a favourable rate, credit scores can have an impact on employment prospects. As part of assessing job applications, employers often perform a credit check on potential employees.
Although a job applicant may refuse this request, doing so could cause a potential employer to assume that the individual has a poor credit history. The job prospects of potential employees with poor credit scores could be harmed in some instances.
Credit scores are also important for obtaining necessities such as a mobile phone. Since the cost of the phone is often included in a contract, retailers will need to ensure that there is a high chance of the outstanding amount being paid over a 12- or 24- month time period.
Individuals with a low credit score may therefore find it more difficult to obtain everyday items at the rates at which they are advertised.
Growing in importance
Credit scores are important, since they can impact significantly on an individual’s financial life. With debt levels continuing to rise in the UK, credit scores seem likely to have an increasing impact in a variety of areas in future.
As such, seeking to improve a credit score could become an increasingly worthwhile pursuit over the long run, with it having the potential to provide greater access to credit at more favourable rates.
It may also have wider repercussions, such as on employment opportunities and in obtaining everyday items. Therefore, now could be the right time for all consumers to focus on their credit score to a greater extent.