Good, Bad, Ugly (credit) - what is it and why is it so important?
When we apply for credit cards and Payday Loans or other types of loans, lenders use 'credit scoring' to determine whether we have good credit or bad credit and to see how suitable we are. As such, each of us automatically has a credit report with several credit agencies such as Experian and Equifax. We also have a score, which is usually a number based on points that tells a prospective lender how risky it is to lend to us. We could have a very poor, bad, fair, good or excellent credit rating and based on this lenders know how much we can afford to borrow. Those with bad credit are riskier to lenders because they are seen as less likely to be able to afford repayments.
We're awarded points based on information recorded by credit reference agencies. This could include whether we're a tenant or homeowner, whether or not we're married and for how long we've worked. How long you've lived somewhere is also taken into account, so if you have a bad credit rating and move around a lot that could be why.
There are lots of benefits to having a good credit rating. Having a good to excellent credit rating means that you're more likely to be accepted for a loan or credit card, but it also means that the interest rates you'll be offered are far lower. Each time you pay off your loan or credit card on time you'll get a green mark on your credit files showing that you're doing well. This adds up over time to show that you're reliable and always pay your bills.
Usually those with bad credit have problems that can be seen on agency records. Bad credit could be due to accounts being in arrears (behind on payments) or even defaulted accounts (not paid at all). Both of these things can lead to you being taken to court by lenders.
It's not always your fault you have bad credit though. If you move house often this will knock points off your credit rating and if you have a large amount of credit available but unused this can affect your rating too. So, cancel cards and Loans you don't use. If you're in debt by over £1,000, you could have a bad credit rating to prevent you being accepted for more 'debt' even though you're making all your payments on time.
Ugly credit applies when you're either bankrupt, recovering from bankruptcy or almost in trouble. This is the sort of credit described as 'very poor' and you'll never get credit deals with a report like that. The only way to improve your credit rating in all cases is to pay off debts on time and you may have to wait up to 6 years.
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