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Learn About Credit Scores

Written by: Rory

Published May 30, 2020

What is a credit score?

A credit score is a tool used by lenders to assess your creditworthiness – that means how trustworthy you are when it comes to repaying any borrowing. You can think of it as a number that represents your financial health.

However, you don't have just one credit score. In the UK, there are three different credit reference agencies (CRAs) – Experian, Equifax and TransUnion. Each one has a different scale and rules when calculating your score.

A credit score plays a key role in a lenders decision to offer credit. When you're applying for the following products it is almost certain your score will be checked:

• Mortgage
• Credit Card
• Personal Loan
• Car Finance
• Mobile Phone Contract
• Bank Account

When applying for financial products it's important to remember, a lender may use a score from any of credit reference agencies. Additionally, each lender will apply their own unique rules, but the CRA score is a good indicator.

What is a good credit score?

Each of the three CRAs has a range of five categories for credit scores: excellent, good, fair, poor and very poor. However, they all use a different scale to quantify each category.

This range for each CRA is as follows:

The higher your credit score, the better it is. Having a good credit score is important, not only will it help you obtain credit, but it will help you access products with cheaper rates, and in turn help bring down the overall cost of borrowing.

How is a credit score calculated?

Each credit reference agency has their own model for calculating your score. However, they all look at a number of similar factors:

• Credit utilisation – this means looking at what you currently owe vs. your credit limits.
• Credit history – looking at how long you've had accounts open and whether or not you are making payments on time, every time
• Credit searches – identifying where you've made applications for credit recently
• Public records – checking you are registered on the electoral roll and that you have no county court judgements
• Financial associates – if you've applied for a financial product with a partner or friend in the past, lenders will see this association and may consider your associates credit score in addition to your own

How do I build a credit score from scratch?

As the credit score calculation relies on existing credit history, it can be difficult for younger people or those who have recently moved to the UK to establish a good score. This is because they do not have any past borrowing to show whether they are a risk, or not.

There are a number of simple steps you can take to start building your credit history:

• Open a UK bank account
• Register to vote and ensure you are on the electoral roll, or if you aren't eligible to vote you can you can complete a residency check with each CRA
• Speak to your bank about a small overdraft facility – you don't necessarily need to use it
• Ensure your utility bills are in your name
• After you've been building your history for a 6-month period, consider applying for a credit builder card. These are designed for people with little or no credit history and will help you build your score. Remember to manage your spending carefully as entry level cards typically have very high interest rates.

What can you do to get a good credit score?

You should check your credit report with each agency and make sure all the information they hold on you is accurate.

Ensure you are registered on the electoral roll. This allows lenders to confirm your identity and you can sign up for free, anytime, here.

Avoid making multiple credit applications over a short period of time and check your credit report before applying again if you've recently been rejected. Try to understand why you may have been turned down.

Make sure you are named on utility bills. Aside from acting as another method of confirming your identity, it demonstrates to lenders that you are trustworthy and financially reliable.

Similarly, make sure you are paying your bills on time. Late payments can have a very significant impact on your credit worthiness. When you apply for credit, in addition to looking at your score from the credit reference agencies, lenders will apply their own additional rules, and many will not accept applicants who have defaulted or made late payments recently.

Use your credit report to review your total credit limit and ensure that you aren't using a high proportion of your credit, aim to use less than 25% of your short-term debt (credit card and overdraft). Lenders typically view higher utilisation negatively.

How do I check my credit score?

You can check your credit score using a number of free services:

• MoneySavingExpert Credit Club lets you check your Experian credit score and credit report
• Clearscore lets you check your Equifax credit score and credit report
• Credit Karma lets you view your TransUnion credit score and credit report

You can read more about credit reports in our follow up guide.