You’ve likely heard the term ‘credit score’ before. You probably know it affects your chances of borrowing money. But what does it really mean? And what score should you aim for?
Don’t worry. This guide will explain what a credit score is, what counts as good, and how you can improve yours.
What is a Credit Score and Credit History?
A credit score is a three-digit number from 0 to 1000. It’s set by credit reference agencies in the UK. This number shows how reliable you are with borrowing and repaying money. Based on your score, it will be rated as excellent, good, fair, or poor.
The higher your credit score, the better chance you have of being accepted by lenders and getting the best deals. Many people don’t know that lenders don’t just use your actual score. They look at many factors to decide what you can borrow and at what interest rate.
There are three main credit reference agencies in the UK:
- Experian
- Equifax
- TransUnion
Each one has its own way of scoring. This means you’ll get a different credit score from each agency.
These agencies create a summary of what type of borrower you are. They assess how likely you are to pay your credit back on time. They then turn this into a number, which is your credit score.
Your credit history is what lenders use to check your creditworthiness. It affects what financial products you can get and the rates you’re offered. Lenders will assess your credit report when you apply for mortgages, loans like short term loans, bad credit loans, etc., and credit cards.
What is a Good Credit Score?
What counts as a good credit score varies across credit reference agencies. They all use different scoring systems, which can be confusing.
However, the higher the number, the better your credit score. For example, with Experian, a score between 881 and 960 is a good credit score. Equifax considers anything between 671 and 810 very good, and anything above 811 as excellent.
Remember that lenders look at your whole financial position, not just one number. Each lender has their own criteria. What one lender sees as important, another might view as less vital.
This doesn’t mean you should make multiple credit applications if one lender rejects you. Too many applications can hurt your score, as we’ll explain later.
So what is a bad credit score? Just like with good scores, there’s no single number to stay above. As a guide, the lower the number, the poorer the score. Experian rates 0-560 as very poor, while TransUnion’s range for poor scores is 0-565.
How to Check Your Credit Score
Many sites let you check your basic credit score for free by signing up for an account. These include the credit reference agencies and third-party services. Some providers offer credit monitoring services so you can track your score regularly.
You can also request your free statutory credit report from each agency. By law, all UK credit reference agencies must provide this once a year. This gives you access to your basic credit data.
For more detailed views of your credit health, you might want to sign up for a paid service. These often include personalised insights and tips to improve your score.
Getting Your Free Credit Report
Here’s how to get your free credit report from each agency:
Experian:
- Visit their website and register for a basic account
- You can access your Experian credit score for free
- For a free credit report, request your “statutory credit report”
Equifax:
- You can get your Equifax credit report through their website
- You can also access your Equifax credit report through services like ClearScore
- Request your free statutory credit report directly from them
TransUnion:
- Access your report through their website
- You can also see your TransUnion data through services like Credit Karma
- Request your statutory report for free
Each agency may show different information since not all lenders report to all three. That’s why it’s good to check all of them.
How is a Credit Score Calculated?
Your credit score is calculated using the information in your credit report. The exact formula varies by agency, but they typically consider:
- Payment history (35-40%): Do you pay bills on time?
- Credit utilisation (20-30%): How much of your available credit do you use?
- Length of credit history (15%): How long have you had credit accounts?
- Types of credit (10%): Do you have a mix of credit accounts?
- Recent applications (10%): Have you applied for a lot of credit lately?
Each credit reference agency has its own way of weighing these factors. This is why your credit score calculated by one agency may differ from another.
Factors that Affect a Credit Score
Many factors impact your credit score, including:
- The number and types of credit accounts you have
- Your previous credit and payment history
- Your credit utilisation and available credit
- New credit applications
If you’ve taken out lots of credit in the past and missed payments, you’ll have a lower score than someone who has managed their borrowing better. If you max out your credit cards and only pay the minimum each month, that will negatively affect your score.
Another issue is making too many credit applications in a short time. If one lender rejects you, applying to many others quickly will count against you. This is especially true if you haven’t fixed the underlying problems.
Does an Overdraft Affect Your Credit Score?
Yes, but it depends how you use it. Going into an unarranged overdraft can hurt your score as it suggests you don’t manage your finances well.
However, if you have an arranged overdraft with a set credit limit and use it sparingly (and pay it off), it’s less likely to damage your score.
Does a Soft Search Affect Your Credit Score?
Soft searches help you find out if you might be approved for credit without a full check. They use details you provide but aren’t verified with a formal check. Lenders won’t see them on your file, and they don’t affect your credit score.
Does Having No Credit History Affect Your Score?
This is a common problem. Some people get stuck in a cycle of not having credit and not being able to get credit. If you have no visible credit history, lenders can’t tell how reliable you’ll be, so your score could be lower.
There are ways to build your credit score that can help solve this problem.
Why Your Credit Score Matters
Your credit score matters because:
- It affects your borrowing options: A higher credit score means more choices and better rates
- It can impact housing: Landlords often check credit scores before renting property
- It may affect employment: Some employers check credit reports for financial positions
- It influences insurance rates: In some cases, insurers use credit-based insurance scores
- It affects utility contracts: Services like phones and electricity may require deposits if you have poor credit
Lenders view people with lower scores as higher risk. This often means they charge higher interest rates or may decline applications completely.
What Credit Score Do You Need for a Mortgage?
A mortgage is one of the largest types of credit you can take out. Many wonder what credit score they need to qualify.
As with other credit types, the higher your score, the better your chances of borrowing and getting good deals. But there’s no specific number to aim for.
Lenders also consider other factors besides your credit score when you make a mortgage application. These include your income, employment status, deposit amount, and monthly spending.
Most UK mortgage lenders will want to see at least a “good” credit score, but each has their own criteria. If your score is lower, you might still get a mortgage but with higher interest rates or a larger deposit requirement.
How to Improve Your Credit Score
If your credit score isn’t perfect, you might wonder how to improve it quickly. However, raising your credit score often takes time. It’s good to have a long-term plan to build better financial habits.
Here are some of the best ways to improve your credit score:
- Register on the electoral roll – This is quick and easy to do online
- Make all payments on time – Late payments can seriously hurt your score
- Pay more than the minimum on debts – This shows lenders you can manage credit well
- Keep your credit utilisation low – Try to use less than 30% of your credit limit
- Check your credit report for errors – Mistakes happen and can be fixed
- Space out credit applications – Too many in a short period looks bad
- Keep old accounts open – Longer credit history helps your score
- Build a mix of credit types – Having different types of credit can help
- Use a credit-builder card responsibly – These are designed to help improve scores
- Pay off existing debt – Reducing what you owe can boost your score
Remember that information stays on your credit report for up to six years. This includes both positive and negative data.
Does Car Finance Improve Your Credit Score?
Taking out car finance can initially lower your score slightly. But if you make all payments on time, it could help improve your rating over time. It shows lenders you can handle long-term credit commitments.
However, you’ll usually only get better rates if you already have a decent credit score. Taking out car finance just to improve your score might not be the best approach.
Do Direct Debits or Credit Cards Improve Your Credit Score?
Regular payments by direct debit for bills and credit cards can help your score if you keep up with them. They show lenders you’re reliable and can manage your borrowing.
However, maxing out cards and paying only the minimum will have the opposite effect. This signals to lenders that you might be struggling financially.
Understanding Credit Utilisation
Credit utilisation is the percentage of your available credit that you’re using. For example, if you have a credit limit of £1,000 and your balance is £300, your utilisation is 30%.
Most experts recommend keeping your credit utilisation below 30%. High utilisation suggests you rely heavily on credit, which can worry lenders.
To improve your credit utilisation:
- Pay down existing balances
- Ask for higher credit limits (but don’t use the extra credit)
- Keep old accounts open even if you don’t use them
- Consider spreading balances across multiple cards
Credit utilisation has a significant impact on your credit score, so keeping it low can help boost your rating.
Common Credit Score Myths
There are many myths about credit scores. Here are some common misconceptions:
- Checking your own score lowers it – False. Soft searches don’t affect your score
- Closing old accounts helps your score – Usually false. It can actually hurt by reducing your credit history length
- You have only one credit score – False. You have different scores from each agency
- All debt is bad for your score – False. Responsible management of some debt helps build your score
- Your salary affects your credit score – False. Income isn’t on your credit report
- Savings improve your credit score – False. Savings accounts don’t appear on credit reports
- Partners’ scores affect yours – Only if you have joint accounts or financial links
Understanding these myths can help you make better decisions about managing your credit.
How Often Your Credit Score Updates
Your credit score typically updates once a month when lenders report new data to credit reference agencies. Some updates might happen more frequently.
Most changes to your credit report will take 4-6 weeks to appear in your score. Major events like defaults or court judgments may appear more quickly.
Final Thoughts
Your credit score is an important part of your financial identity. It affects your ability to borrow money and the rates you’ll pay. By understanding how it works and taking steps to improve it, you can open up more financial options.
Remember that building a good credit score takes time. Focus on developing good financial habits like paying bills on time, keeping debt levels low, and using credit responsibly.
Check your credit report regularly to catch any errors and track your progress. With patience and good habits, you can improve your score over time.
Disclaimer: We do not provide financial advice; this guide is for informational purposes only.
