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A guide to credit scores

Clare Kneebone

5 min read

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If you apply for any sort of borrowing, from a mortgage to an overdraft, the company will need to make a decision as to whether or not they should lend you the money. Lenders base this decision on several different things, and one of these is your credit score.

What is a credit score?

There are three main credit reference agencies (CRAs) in the UK – Experian, Equifax and TransUnion. These agencies gather information about your past financial behaviour (also known as your credit history), put this into a credit report and calculate a three-digit credit score based on this information.

Lenders will ask one or more of these agencies for information about you before accepting your credit application. The better your credit score, the more likely you are to get access to credit and to the lowest interest rates on your repayments.

How do you build and maintain a good credit score?

The CRAs are sent information by lenders about the credit you have and how you manage it. This may include whether you make repayments on time every month, and whether you stay within the credit limits you have been set. They also record information such as your financial associations (for example whether you have a joint account with another person or a shared bill with housemates).

Other information includes any adverse court judgements based on your financial behaviour (such as a CCJ or bankruptcy), how many recent credit applications you have made, and whether you are on the electoral roll.

Once the CRA has enough information about you, they will generate a credit report and calculate your credit score.

Someone on the electoral roll, who has always repaid credit on time, has no adverse court judgements, and hasn’t made too many recent credit applications over a short period of time lt is more likely to have a better credit score. They are therefore likely to be a low risk for lenders.

What is a good credit score?

Experian says there’s no ‘magic number’ when it comes to your credit score, and how each CRA calculates the score can vary, but they all base the score on the same information. As you’d expect though, the higher your score, the better your rating.

How can I check my credit score?

You can sign up with the different CRAs to check your score if you’re thinking of applying for credit. With identity theft more common these days, it’s worth reviewing your report on a regular basis so that you can check for any errors or credit applications that shouldn’t be there.

What if I’ve never taken out any credit?

If you’ve never applied for any form of credit, you won’t have a credit history, which makes it difficult for lenders to understand how well you manage money. This could result in difficulty getting hold of credit when you need it. For this reason, it’s worth taking out a credit card, using it sensibly and paying off the balance each month, so that lenders can see that you can borrow money responsibly.

What if I have a lot of credit?

Lenders will also consider your existing credit. The key is that you’re not using too much of the credit available to you; this is called credit utilisation. If you have a credit card with a limit of £5,000 and you have a balance of £4,000 , your existing credit utilisation is high, and this may count against you if you’re looking for more credit. Keeping your credit utilisation below 50% is the key here.

What if I have a bad credit score?

If you have a low credit score you might have a smaller range of products to choose from, as well as a lower credit limit and a higher interest rate. There are products available specifically for people with poor credit to help them rebuild their credit score. You’ll need to use these responsibly to build up a better financial history.

What if I spot a mistake on my credit file?

Errors such as missing information, mistakes, outdated information, or transactions you don’t recognise can harm your credit score. If you spot something that doesn’t look right, you can write to the CRA with supporting evidence to have the error removed from your file.

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