Martin Lewis explained what it means when your credit score has dropped. The finance guru reassured cardholders that it might not be as damaging as they might think, in a video posted to MoneySavingExpert’s YouTube channel.
Explaining what a credit score is, Martin said: “In the UK you don’t have a credit score. There is no overall figure that dictates to a lender whether they should lend to you. or not. It doesn’t really exist… Many of you can connect to a credit agency [such as Equifax] and you can see a number out of 600 or 1000 which shows you your credit score. The number is different with different referral agencies – this shows you that it’s not a standardized thing. So what is it?
“Each lender will establish their own credit score about you. They will integrate all the data about you and develop their own system to decide whether you are a profitable customer or not… each lender tries to evaluate you according to their own list of wishes. [Credit reference agencies] are a roughly average indication of what a lender would value you putting in digital form. »
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Martin said it’s important to understand that different lenders value different things when it comes to your credit history, which means one lender may value something that another lender dislikes. He said: “One of the most common questions I get is, ‘I have empty credit cards, should I cancel them? Is it good or bad for my credit score? “. Whether it’s good or bad for your credit score, the real question is, ‘Will this make me more creditworthy?'”
“The answer to that is some lenders will say, ‘You’re canceling your credit card, so you have less credit available. You can’t borrow elsewhere, it’s good for your credit score. We see that as a positive.” Other lenders will look at it and say, “We like evidence of longevity and loyalty and that you’re going to stick with it. The fact that you cancel these cards goes against that, so we consider it a disadvantage.”
Martin said if you go ahead and cancel your card, your credit score could go up or down depending on which credit reference agency you are with. However, these scores should only be used as a guide. You can get more money news and other story updates by subscribing to our newsletters here.
He said: “Remember that the credit score you see from any of these reference agencies is only a vague and rough interpretation. It doesn’t mean you won’t get instant credit. in the future. I also wouldn’t worry much, especially not on a matter like that. It’s just a small technical tweak to the way they’ve set up their credit scoring system. This does not mean that lenders actually follow it.
Martin said there’s another problem with focusing too much on credit scores — it’s missing the number one piece of information lenders look for when deciding whether to give someone a loan. He said: “How much you earn is not on your credit score. Let’s say you earn £50,000 a year, you have a perfect credit score and you apply for a £5,000 loan. You have a pretty good chance of getting it.
“Then you lose your job, six months later, you have no other credit problems in the meantime, you still have a perfect credit score, you have no income, you apply, he says you’re unemployed, you say you have no income – you won’t get the £5,000 loan.”
While Martin doesn’t want people to treat their credit scores as if they’re set in stone, he said they should be taken more seriously by those who have significantly damaged their creditworthiness. “If you have a big problem that affects your creditworthiness, [such as] if you miss payments, you default, you can’t pay your mortgage, and it’s recorded, of course that’s going to have a massive impact on your credit score and it’s going to massively affect your creditworthiness as well.” , he said, “What I’m trying to say is that there is no rigid link between your credit score and your creditworthiness.
“Yes [your credit score] up or down a bit of something relatively insignificant, that you wouldn’t think was too bad to do, I wouldn’t worry. But if you do something that’s actually an obvious credit sin and your credit score goes down, then there’s a reality to that.”