14 Reasons Why Your Credit Score is Important
Updated on Thursday 17 August 2023
A poor credit score can have a huge impact on your quality of life, affecting not only what you can borrow but where you live, what you drive, how you pay bills and even where you can work.
In the 21st century, a credit score matters more than ever and a good credit score will not only save you money but make your life more comfortable and less stressful.
Lenders make financial decisions based on your credit history and are more likely to lend to someone with an excellent history of repaying debts in full and on time.
Also, if you have a poor credit history, this usually affects the interest rate applied to any loans or credit cards, meaning your repayments will typically be higher and borrowing money will cost you a lot more.
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Does your credit score matter in the UK?
Yes, your credit score and credit report matter to UK lenders, insurers and even some employers.
If you apply for any type of credit, such as a credit card, personal loan, bank overdraft or mortgage amongst other things, a lender will check your credit score and report to verify your address and creditworthiness, when deciding whether to lend you money.
In fact, a low credit rating in the UK can make it difficult for you to buy or rent a house, buy or lease a car, gain certain types of employment, pay for utility bills by direct debit or take out a new phone contract.
In addition, making purchases of large, expensive household items like new furniture or kitchen appliances is much more affordable with buy now, pay later [0% interest] deals. With bad credit, these types of deals are rarely offered, meaning you may have to resort to buying second-hand or used furniture and appliances instead.
What is a healthy credit score?
A good credit score varies between credit reference agencies. There are three main agencies in the UK and their fair, good and excellent credit ratings are as follows:
Experian
Fair: 721-880
Good: 881-960
Excellent: 961-999
Equifax
Fair: 380-419
Good: 420-465
Excellent: 466-700
TransUnion
Fair: 566-603
Good: 604-627
Excellent: 628-710
To apply for a free multi-agency report and check your credit score with all three agencies in one fail swoop, head over to checkmyfile.com by tapping the button below and sign up to a 30-day trial - after your free trial, it will cost £14.99 per month, but you can easily cancel anytime:
Why do I need a good credit score? - 14 reasons
14 reasons why you need a good credit rating and why it’s so important are:
1. Overdraft facility
To check if you’re eligible for an overdraft facility, your bank will want verification that you’re over 18, live in the UK and are a responsible borrower by checking your credit score.
2. Credit cards
Credit card companies will conduct many checks about you, your status and income before accepting your application, including your creditworthiness.
The health of your credit score will affect the type of credit cards you are offered and if you have a poor credit score, you may only be able to obtain a credit builder credit card with a higher interest rate. Conversely, if you have a good credit rating and meet all the other criteria favoured by lenders, you could be offered the best credit cards with the best deals (i.e. a 0% purchase or balance transfer credit card).
Read more: What is a credit check?
3. Personal loans
Whilst having an excellent credit score can help you get a personal loan, that alone isn’t enough to guarantee one. If you have no credit history or collateral, this is just as damaging to a personal loan application as having a poor credit rating.
It might be that you need to apply for a guarantor loan if you do not meet lenders’ criteria for unsecured loans.
Note: If you default on paying back this type of loan, the debt will then become your guarantor’s financial responsibility and the lender will insist your guarantor pays on your behalf.
4. Car loans
At some point in your life you will not be content to drive around in an old banger, especially if you have image-conscious children! And, unless you have a huge amount of disposable income, wealthy parents or win the lottery, a new or nearly new [used] car will be out of your reach without taking out a car loan. When you apply for a car loan, credit checks will be made and can significantly affect your eligibility and/or the interest rate applied to your loan.
5. Business loans
Most new start-ups require an injection of cash to buy equipment, services or goods and many established businesses may want to borrow money to expand. Whatever the reason, you will struggle to get a business loan or an affordable one with an unhealthy credit score and a patchy credit history.
6. Mortgage Lenders
The average monthly rent in England is currently £700 per month, according to the ONS, and a study by Halifax revealed the average monthly mortgage payment is currently £669 per month.
So besides building up a nest egg for your retirement, a financially secure future, collateral or an inheritance for your loved ones, buying a house can actually be cheaper than renting. In addition to your personal details and your debt to income ratio, lenders will also look at your credit rating and history. A poor credit history could lead to your application being refused or you having to pay a higher interest rate increasing the cost of your mortgage payments. Also, if an application for a mortgage is declined, this will have a further negative impact on your credit report and score.
Read more: What credit score do you need to get a mortgage?
7. Landlords
When you apply for a rental property, credit checks will be made by the landlord or their agents. If you have a poor credit history, this could seriously thwart your application as rental property demand is high. If you have a poor credit score, a landlord or their agent may grant you a tenancy if you have a guarantor or pay a lump sum for rent in advance, but acceptable criteria varies widely between landlords.
8. Employers
If you want to work or currently work in the financial industry, many main employers now conduct credit checks on their employees during the hiring process and when assessing an employee’s eligibility for a promotion/pay rise. This can also be the case if you want to work in the legal profession and some other professions too. For this reason, you should check your credit reports before applying for certain jobs where checks are made. If you get a job where your personal finance management is important, you should seek to maintain a high credit rating (or at the very least an average one) for the duration of your employment.
9. Interest rates
When you apply for any type of borrowing, the deals and interest rates (APR) offered will vary according to your creditworthiness. Low credit scores usually mean higher interest rates, making borrowing less affordable and costly. Taking out a high interest loan or credit card is a risky business and could lead to insurmountable debt that negatively affects you and any dependants you may have.
10. Utility bills
When you move into a new home or change energy suppliers, utility companies will conduct credit checks to ensure you’re likely to pay your utility bills. If you have a history of missed utility bill payments, an energy provider may require you to pay for your energy supply upfront and/or have a prepayment meter installed.
That said, apparently, EDF Energy, Ecotricity, Co-operative Energy, Better Energy and Spark Energy do not conduct a credit check for post-pay customers, so if you have a poor credit history of missed or unpaid utility bills, applying to one of those companies may be a good solution.
11. Insurance
When you apply for car insurance or home insurance, the insurance provider will conduct a soft check of your credit history. This is because many people choose to pay for their insurance by monthly direct debit and paying this way is effectively borrowing money, so having bad credit usually affects what deals you’re offered by insurers and you can end up paying more than customers with good credit.
12. Mobile phone contracts
Because the latest mobile phones are so expensive, most of us choose to take out a phone contract at some point. Those with a poor credit history will struggle to get a phone contract and may need to resort to ‘pay as you go’ instead.
13. Household items
Many household items are too expensive to buy outright and with a poor credit score, 0% interest and/or buy now, pay later schemes will be off the cards.
14. Holidays
Whether you take a staycation or travel abroad, holidays are expensive and if you have a good credit score (and meet other loan criteria), you should be able to get a low-interest holiday loan to finance your dream vacation.
Furnished with the significance of your credit score, you should now check out our blog How to improve your credit score immediately for invaluable tips and tricks on how to build your credit rating for a brighter financial future.
You should also remember to keep tabs on your credit score if you haven't done so already - you can do this for free here with Checkmyfile (30-day free trial and £14.99 thereafter, but cancel anytime):