What are credit scores?
A credit score is a rating based on an entity’s financial information, such as their borrowing and repayment history, defaults on utility bills, credit cards and loans, credit applications, bankruptcy and debt agreements, previous credit report requests, as well as adverse information such as court writs or default judgements.
How are credit scores calculated?
Credit scores are calculated by providing a score between 0 and 1,000 (or 1,200, depending on the reporting agency), based on the contents of the credit report, such as the amount of money your client has borrowed, the number of credit applications they have made, as well as details regarding their payment history and late payments. The score relates to a scale (excellent, very good, good, average, and below average).
Why are credit scores important?
Credit scores are important for service providers and financiers to understand before performing services or providing finance for their clients. You can look at your client’s credit score when deciding whether you will perform work for them, as it gives you an indication as to how much risk you are exposing your firm to. For instance, a client with a demonstrated ability to pay their utility bills on time is more likely to also pay their professional service fees on time.
Conversely, a lower score represents a higher risk, and providers and financiers should be cautious when performing services or providing finance for clients with lower scores. It is worth having an open discussion with your client regarding their poor credit score, as matters which may have been resolved can stay on their credit report for up to seven years.
Their position may have improved since the matter was resolved, however their score may not yet reflect that. Without having a discussion, a poor score can lead to providers forming a negative view of the client’s financial integrity.
By having a solid understanding of credit scores, you will also be able to better help your clients. Understanding what the score means and how it works means you can help your clients qualify for loans or credit which may be harder to get, ensure they are getting an appropriate interest rate relative to their score, and in terms of businesses, ensure they remain attractive to their customers or prospective customers.
Can credit scores be improved?
There are simple steps your clients can follow to improve their credit score, or ensure they maintain a healthy credit score. While some of these tips may seem straightforward, many people may not realise that such simple steps can have such an impact on their credit score. FeeSynergy partner, Equifax, recommends the following for your clients to improve their credit score:
- Ensure bills and loans are paid on time. Direct debits and scheduled repayments can assist in avoiding late payments.
- Keeping track of their commitments and research before applying for credit. Making several applications within a short time frame will be recorded on their credit report and can indicate credit stress.
- Service providers and lenders should be notified of a change in address or email address so bills can be redirected and paid on time.
- Talk to their credit provider if they are having trouble meeting their repayments. Being proactive about experiencing difficulties is always viewed more favourably than delays or non-payment.
- They should be proactive and check their credit report periodically. They will be able to access a free credit report once a year.