What is a Credit Score?
In the financial world there’s a lot of different terms you might not fully understand – and for many of us the term ‘credit score’ is one of the main culprits.
So, if you have found yourself wondering ‘What is a credit score?’, then help is at hand in this post, as we’ve broken this down into an easy to understand definition.
‘What is a Credit Score?’ – Our Definition
Your credit score is an evaluation of how credit-worthy you are, based on your previous credit history. This is given as a number, and essentially the higher the number, the better your credit score.
This personal number also determines how trustworthy you are to lenders as it also helps them to determine how likely it is you’ll be able to pay back what you owe them.
Is a Credit Rating Different to a Credit Score?
Along with the definition to the term ‘credit score’ you might have also asked yourself ‘What is a credit rating?’ and wondered whether these two are different in any way. The short answer is that technically these are different credit assessments, but ultimately, they are used for similar purposes.
As mentioned above, a ‘credit score’ is something that assesses the creditworthiness of an individual in the form of a number. A ‘credit rating’ is also used to assess how credit-worthy something is, but it’s often given as a letter and instead applies to a group, business or even a government, rather than an individual.
How is a Credit Score Calculated?
In the UK there are three Credit Reference Agencies (CRAs) – Callcredit, Equifax and Experian – and each of these CRAs receives information about your credit history, how well you have managed it and what your financial situation is like as a result.
On top of this, they look into your other public records to essentially fact-check you and your credit history and review any data there is on your accounts to create your initial ‘credit report’. Then, based on this report, one of the CRAs will work out your credit score.
These agencies are more commonly called upon by lenders who are wanting to assess the risk of lending to individuals who have applied for loans or other financial support from them.
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