Dec 3, 2024, 10:30 PM
Dec 3, 2024, 10:30 PM

Martin Lewis reveals the truth about your credit score

Highlights
  • Martin Lewis revealed that individuals do not actually have a credit score as commonly perceived.
  • He identified three key factors used by lenders: debt ratio, credit utilization, and disposable income.
  • Lewis concluded that understanding these factors is more beneficial than becoming fixated on fluctuating credit scores.
Story

In a recent episode of his live ITV show, British money-saving expert Martin Lewis discussed the misconceptions surrounding credit scores. Contrary to popular belief, Lewis stated that individuals do not possess a 'credit score' as commonly understood; instead, they are assessed using a different set of criteria. He explained that credit reference agencies provide a scoring tool that represents an approximation of how lenders evaluate an applicant's creditworthiness. Lewis urged the audience to not become overly concerned with minor fluctuations in these scores since they are merely indicators rather than definitive measures. He pointed out that a single key factor typically dictates whether a loan or credit application is approved. During his discussion, Lewis presented the 'big three' factors that truly matter to lenders when considering an individual for credit. The first is the debt ratio, which reflects the amount of existing debt relative to one's income. He clarified that while a lower debt ratio is usually favorable, having some debt can also be advantageous, as lenders may perceive it as an indicator of responsible credit usage. For instance, Lewis provided an example involving a person with a £10,000 credit card and a £40,000 income, resulting in a 25% debt ratio. He advised that individuals could improve their standing by either reducing their debt load or increasing their income. The second factor discussed was credit utilization, which is the percentage of available credit that a person is currently using. Lewis noted that it is possible to lower credit utilization by reducing existing card overdraft debts or obtaining additional credit that remains unused. He added that high credit utilization combined with a significant debt ratio poses more of a risk in the eyes of lenders. Lastly, Lewis highlighted the importance of disposable income, which refers to the funds remaining after accounting for necessary expenses. He concluded that a higher disposable income is generally more favorable in the evaluation process. By shedding light on these critical components of credit assessment, Lewis aimed to guide viewers in understanding how lenders determine eligibility rather than conforming to the misleading idea of having a specific credit score.

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