Credit scores explained

Credit scores can help us judge how likely we are to be accepted for financial products such as mortgages, credit cards and loans. Find out how credit scores work and why it is important to keep an eye on yours.

Brean Horne Published on 17 August 2021.
Credit scores explained

Your credit score is important and has an impact on almost every area of your financial life.

From applying for a mortgage or credit card to the price you pay for car insurance, your credit score dictates how likely you are to get accepted for certain products and the interest rate you will pay.

Understanding your credit score can help you improve your credit history and the chances of being approved for credit in the future.

Here we explain exactly what a credit score is and how it affects the financial products you can choose.

What is a credit score?

A credit score, or credit rating, is a three- or four-digit number that lenders use to see how dependable you are at repaying money. It gives a snapshot of your financial history and how you have handled borrowing in the past.

Lots of companies including banks, energy providers and insurers might look at your credit score to see if you qualify for products including:

Generally speaking, a higher credit score means that you are more likely to be accepted for credit. That’s because a high credit score suggests that you are a reliable borrower who repays money on time.

And the lower your credit score, the less likely you are to be accepted for certain products because it might suggest to lenders that there is a risk you won’t be able to repay the money you borrow.

» MORE: Find out who can perform a credit check on you and why

How do you get a credit score?

A credit score is calculated using data from your credit report. Your credit report is a bit like a CV for your finances and includes the following information:

  • Address history: Your current address and any previous addresses.
  • Credit history: Financial credit agreements such as loans, credit cards, mortgages, overdrafts, mobile phone contracts, car finance and any late or missed payments.
  • Credit applications: How many applications for credit you have made, including those where you have been rejected.
  • Public records: Electoral roll information, any county court judgments (CCJs), bankruptcies or insolvencies.
  • Financial ties: This includes anyone you have taken out joint credit with, for example, a joint mortgage or bank account.

Your credit report does not include details about your:

In the UK, there are three main credit reference agencies: Equifax, Experian and TransUnion, which collect financial data for your credit report and generate a credit score for you.

How to check your credit score

The UK’s main credit reference agencies Experian, Equifax and TransUnion offer a free statutory credit report. This is a basic snapshot of your financial history that includes:

  • credit agreements
  • missed or default payments
  • electoral roll details

Your statutory credit report doesn’t include your credit score or monitoring services. Experian and Equifax offer these additional services if you pay a subscription fee.

You can check your credit score for free using other platforms that pull data from the main credit reference agencies.

These platforms offer a full credit report that includes your credit score. They also offer credit monitoring services that show how much your score changes each month and give tips on how to improve your score.

You can also use their eligibility calculators that show how likely you are to be accepted for certain loans and credit cards.

» MORE: Find out how to check your credit score

What is the average credit score in the UK?

Each credit reference agency uses a different method for calculating your credit score, so there isn’t a universal average credit score in the UK.

That is because lenders don’t report your data to every credit reference agency. Some lenders only report to one or two agencies while others might share your information with all three.

Equifax gives you a credit score from 0 to 1000, while Experian scores from 0 to 999 and TransUnion scores from 0 to 710.

What is a good credit score?

A good credit score varies depending on the credit reference agency because each one has its own rating system. For instance, with Equifax, a good credit score is anything over 531 while for Experian it is 881 and with TransUnion, it is 604.

So don’t panic if your credit score looks a little different in each credit report. The main thing to look at is the classification of your score.

The table below shows the different credit score classifications for each credit reference agency.

Equifax Experian TransUnion
Excellent 811 - 1,000 961 - 999 628 - 710
Very good 671 - 810 - -
Good 531 - 670 881 - 960 604 - 627
Fair 439 - 530 721 - 880 566 - 603
Poor 0 - 438 561 - 720 551 - 565
Very poor - 0 - 560 0 - 550

These boundaries and names are not strict rules, and they are intended only to be used as a guide to give you an idea of how a lender may view your credit file. Each lender has different opinions on what they consider to be good or acceptable for their own products.

» MORE: Discover what a good credit score is for a loan, mortgage and credit card

What affects your credit score?

Your credit score is not set in stone and can be affected by the following things:

Applying for credit

Each time you apply for credit a lender will carry out a hard search and check through your credit history, which leaves a mark on your credit report.

Applying too often for credit in a short space of time can negatively affect your credit score. That is because lenders may view multiple credit applications as a sign that you are in financial difficulty and may not be able to repay what you borrow.

Try to limit the number of credit applications you make throughout the year. It is also worth using an eligibility calculator before applying for credit.

Eligibility calculators use soft searches on your credit history, which don’t show up on your file, to let you know how likely you are to be accepted for certain products.

Missing or late repayments

Missing repayments or paying late can hurt your credit score. Whenever you miss a repayment, it is recorded on your credit report.

So if you apply for new credit, lenders may see the missed repayments and reject your credit application as there could be a higher risk that you will not repay them.

If you miss several payments, your lender may place your account into ‘default,’ which has an even harsher impact on your credit score.

Missing and default payments stay on your credit report for six years.

Credit usage

The amount of credit you use, which is called your credit utilisation rate, can affect your credit score.

Using too much of your credit limit could signal to lenders that you are relying on credit and may not be able to pay it back. It is recommended that you keep your overall credit utilisation below 25% to 30%.

Lenders are more likely to accept applications for customers with a lower credit utilisation rate because it shows that you don’t rely on credit and can use it responsibly.

You can work out your credit utilisation rate by dividing your credit card debt by your available credit limit. For example, if your credit card limit is £1,000 and you use around £500 a month, your credit utilisation rate is 50%.

Bankruptcy, IVAs and CCJs

If you have declared bankruptcy, have a County Court Judgment against you (CCJ) or an Individual Voluntary Agreement (IVA), your credit score will be negatively impacted.

That is because it is an indication that you have not been able to keep up with your financial commitments in the past. Lenders will therefore look at you as more of a risky proposition and are potentially more likely to reject your credit application.

It is still possible to rebuild your credit history if you have bankruptcy, a CCJ or IVA marked on your credit report. Once your debt is under control, you can use financial products designed to help you rebuild your credit history such as a bank account for bad credit or a credit card for bad credit.

Mistakes on your report

Mistakes on your credit report can have a negative impact on your credit score.

Typos in your name and address or outdated address information can make it harder for lenders to verify your identity. This could reduce your chances of getting accepted for credit and could harm your credit score. Errors with your credit application records and payment history can negatively affect your credit score too.

It is important to correct any mistakes on your credit report as soon as possible. You can do this by contacting the credit reference agency.

Financial associations

A financial associate is someone you are linked to through shared finances, for example, if you have a joint mortgage or a joint bank account.

When you apply for credit, a lender may check the credit history of your financial associate as well, because they may affect your ability to repay your debt.

If your financial associate has a poor credit history, for example, if they were declared bankrupt or have CCJs, this could increase the chances of you being rejected for credit, which could harm your credit score.

You can remove a financial associate from your credit report if your credit agreement comes to an end or your circumstances change by contacting the credit reference agencies.

» MORE: How do joint mortgages work?

How to improve your credit score

The beauty of credit scores is that they can change, meaning that you can always improve yours.

Here are a few simple ways to boost your credit score:

  • Check your credit score: Knowing your credit score and credit history can help you find areas to improve.
  • Repay on time: Keeping up with repayments shows lenders that you are a reliable borrower and can handle regular repayments.
  • Use credit wisely: Keeping your credit utilisation low shows that you use credit responsibly and don’t rely on it too heavily.

It is important to remember that improving your credit score is a marathon, not a sprint. So it may take a few months or more to see the benefits of your actions.

» MORE: Find out more tips on how to improve your credit score

What is a thin credit file?

A ‘thin credit file’ is when there is not enough financial data about you for lenders to decide whether to give you credit. It is sometimes referred to as being ‘financially invisible’.

While it might sound like a cool superpower, being financially invisible can have some adverse consequences.

Having a thin credit file can leave customers unable to access credit for financial products such as mortgages, loans and even mobile phone contracts. And those who are approved for credit may have to pay higher rates. That is because lenders are reluctant to give credit to people with little to no history of repaying it.

It is a common issue for new borrowers or people who don’t use much credit. It can be a frustrating cycle because you need credit to build your credit history.

There are a few ways to build your credit history if you have a thin file:

  • Start small: Take out small amounts of credit and repay them on time to help build your credit score. Always use an eligibility calculator before applying to see what products you are most likely to be accepted for.
  • Get on the electoral roll: Registering to vote helps lenders verify where you live and helps boost your credit score.
  • Pay household bills: Put regular household bills, such as energy, water or broadband in your name and set up a direct debit to make sure you pay them on time.

» MORE: Find out how to rebuild your credit history

Image source: Getty Images

About the author:

Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more

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