If you’re looking to borrow money, lenders want to know that you can make your repayments. To work this out, they’ll usually look at your credit history when you apply.
Credit scores can be a confusing part of this process because you don’t have one definitive score. Each credit reference agency and lender has its own way of calculating your score, meaning it can differ depending on where you look.
But credit scores are important because they can help you understand the likelihood of being accepted for credit before applying, and whether you’ll get more favourable interest rates. You can then either apply or take steps to improve your credit score before making an application.
Here we explain and demystify what credit scores are and how they work.
What is a credit score?
Your credit score is a three or four-digit number calculated based on information from your credit file held by the credit reference agencies. The three credit reference agencies in the UK are:
- Equifax
- Experian
- TransUnion
This number will be within a range, for example ‘fair’ or ‘very good’, which helps you to see how lenders may view your application for credit.
Generally speaking, a good credit score means it’s more likely you’ll be accepted for credit and be offered cheaper interest rates. That’s because your credit report probably suggests that you’re a reliable borrower who repays money on time.
The lower your credit score, the less likely you are to be accepted for certain products, because your credit report is telling lenders that you may struggle to make your repayments.
A number of services allow you to check your credit score. These include two of the three credit reference agencies, Equifax and Experian, as well as websites such as ClearScore, Credit Karma and TotallyMoney.
Some services allow you to check your score for free, while others require a monthly subscription.
Credit score vs credit report: what’s the difference?
While they both use the same data, your credit score and credit report aren’t the same thing.
Your credit report, or credit file, is a full view of your credit history. Most information stays on your report for six years. Active credit accounts display payment history for the last four years.
Credit reference agencies and other services use the data from your credit report to work out a score that helps to show you how a lender might view your creditworthiness.
Because your credit score uses information from your report and is a number that goes up or down, it can be a useful way to know whether your credit file is healthy – or whether you need to make improvements.
If your credit score changes unexpectedly or isn’t where you want it to be, you can investigate by checking your full credit report.
Keep in mind that credit scores don’t appear on credit reports. You’ll usually need to sign up for a separate account or service to view yours.
How do credit scores work?
You don’t have one universal credit score. Each of the three credit reference agencies works out your credit score differently, meaning it will be different depending on where you look.
Your score falls in a particular range that indicates whether you have an average credit score, a good one or a poorer one. And because each of the three credit reference agencies bases your score on similar data from your credit file, it should sit within a similar range no matter where you look.
If your score is in significantly different ranges across the credit reference agencies, there could be a problem with the data they have about you. In this situation, it’s wise to check your credit file across all three for errors or discrepancies.
Do lenders use credit scores?
Each lender has its own way of working out your creditworthiness. While it will usually request your credit file from a credit reference agency, it may not look at the agency’s score for you.
Instead, a lender usually looks at data from your credit file along with what you’ve told it during your application to come up with its own score, to decide whether to go ahead or not.
You won’t be able to see this score, but if you ask, the lender has to tell you which credit reference agency it used to gather your information.
How is your credit score calculated?
The credit reference agencies calculate your credit score using information from your credit report. Points are added or removed from your score based on factors such as your repayment history and how many times you’ve applied for credit recently.
The details that credit reference agencies use to work out your score include:
- Credit account information. This includes your balances, credit limits, overall credit utilisation and repayment history. For example, recent missed payments will usually decrease your score, while low credit utilisation (essentially how much of your available credit you’re using) can improve your score.
- The electoral roll. Being registered to vote helps lenders identify you and benefits your score.
- County court judgments (CCJs) and insolvency. Would you struggle to make the repayments because you have CCJs or have been made insolvent? This drastically reduces your credit score.
- Recent credit applications. Too many hard searches in a short time can knock points off your credit score.
- Financial links. If you’re financially connected with somebody else, for example through a joint loan, mortgage or bank account, their financial circumstances could influence your credit score.
» MORE: Why has my credit score gone down?
What does your credit score start at?
The simple answer is that credit scores from credit reference agencies sit within a range that starts at zero and goes up to a three or four-digit number. These ranges are:
- 0-1000 for Equifax
- 0-999 for Experian
- 0-710 for TransUnion
The more complicated answer is that you won’t have a credit score if you don’t have a credit history, making no credit score the starting point.
In fact, millions of people in the UK are credit ‘invisibles’ – there isn’t enough information about them to allow financial institutions to decide whether to lend them money. These people can find it difficult to access mortgages, personal loans, credit cards and even mobile phone contracts.
People with limited credit history can include young people, immigrants to the UK and the ‘unbanked’ – people who don’t use basic banking services at all.
Steps you can take to build a credit history include:
- opening a bank account
- registering to vote
- making utility bill payments in your name
- opening a credit card (and using it carefully) – credit builder cards are specifically designed to help people build their credit file
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