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Credit scores: what you need to know

Last updated: 28/11/2022

If you’re clueless about credit scores or you’ve come across myths on how to improve yours – and tales of what can send it plummeting – this article covers everything you need to know.

Don’t fret if you don’t know your score, as 69% of UK adults don’t know their current credit score, according to a YouGov survey conducted in 2021.

From simple tips for building your credit rating up from scratch, to the nitty gritty of how to get it back from the brink, read on to understand how you can help put yourself in a better position for the future.

What is a credit score?

A credit score – AKA a credit rating – is a measurement used by banks and lenders to assess whether you could reliably pay back a loan, such as a mortgage.

This is deduced from your credit report, which is based on your entire financial history. You are given a rating to show your ‘trustworthiness’ in repaying borrowed money. The purpose of this rating is for banks and building societies to see how much of a risk they are taking by lending money to you by analysing your borrowing habits and finances, over the years, along with a range of other measures.

Simply put, the higher your score and cleaner your credit report, the more likely you are to be approved for mortgages or loans.

There are three agencies in the UK that calculate the ratings: Experian, TransUnion and Equifax.

Confusingly, each agency uses its own method, data and calculations to produce your score, so there is a chance it will vary between them. Experian’s scores range from 0 to 999, while TransUnion’s vary from 0 to 710, and Equifax’s from 0 to 700.

Also, each lender has different thresholds of ratings they deem acceptable. So, while some may be happy to offer you a loan with one score, others may not. Generally, the higher the score, the better your chances.

While they are not set in stone, these are the 10 key aspects of your profile that are commonly taken into account when calculating your credit rating or score:

  1. Your name and date of birth
  2. Your former addresses (used as identifying information)
  3. Electoral roll information
  4. County court judgements (CCJs) within the past six years
  5. Previous bankruptcy or insolvency declarations
  6. Past home repossession
  7. Money you currently owe to lenders
  8. Repayment history for loans and credit you have taken out
  9. Excessive credit applications in a short space of time
  10. Having a joint account with someone who has a bad credit history

It might surprise you to hear that things like student loans, your criminal record, council tax arrears or the amount of money in your current and savings accounts aren’t taken into account.

There are also common myths that there is a credit blacklist of people who are banned from being approved for credit, and that checking your own credit score too often is harmful to it. Both of these claims are false and will never affect your rating.

Why is it important to have a good credit rating?

At some point or another, your credit rating is going to be assessed. Your credit rating and report are most likely to be reviewed in the following scenarios:

  • Buying a car on finance
  • Taking out mobile phone, TV or broadband contracts
  • Signing up for utilities such as gas or electricity
  • Applying for a mortgage, credit cards or loans
  • Getting car or home insurance
  • Requesting an overdraft for your bank account

In order to avoid issues with being approved for these applications, it’s essential to ensure your credit rating is as strong as possible. Any blips in your history, major or minor, can lead to you being turned away by lenders. Don’t worry, though, as there are many ways to start building a good credit rating or improving your score.

Where can you find your credit score?

It’s free to check your credit score and report. 

You can check your Experian credit report through their partner website, MoneySavingExpert’s Credit Club; Equifax credit report through ClearScore; and your TransUnion credit report through Credit Karma. Now you know what your credit score is, you’re probably wondering how you can get started with building yours up or improving it.

Firstly, ensure you are up-to-date with your credit report so you know what you are working with. Check your score and report using one of the sites above and look out for any obscurities or concerns. Contact one of the agencies that provide the scores and go through the inaccuracies with them so you can appeal to have them amended – there will be a minor fee for this.
You also need to make it a point to avoid making any late payments for bills, credit cards, loans, or overdraft fees. This includes any standing orders or Direct Debits you have outstanding.

Missed payments are highlighted on your report and are an immediate red flag for lenders as they show unreliability. So, set yourself reminders and check you have enough money in your account on the day payments are due to go out.

The next tip is the easiest to follow: being on the electoral roll. This simply means registering to vote from your current address, which shows that you are living there to lenders. Be aware that moving house too frequently is another area that is frowned upon by lenders. If you are not eligible to vote in the UK, you can send proof of your address for verification in the form of bills or a driving license to the three credit rating agencies.

Showing that you can responsibly pay back credit is encouraged. You can do this by building your credit history using a credit card – avoid using the full limit – that you pay off, in full, monthly. Note that you should not withdraw cash from a credit card, unless you need to when abroad.

On the other hand, if you have lots of credit cards and store cards that you rarely use and signed up to on a whim, your best bet is to cancel these as it shows you have too many credit options. Stick to keeping your most-used or oldest accounts and cards open and ditch the rest.

Finally, avoid applying for credit too frequently as this can also highlight poor money management. If you are applying for loans, you should also try to steer clear of payday loans, which are frowned upon by mortgage lenders.

One of the crucial things to remember for keeping your credit rating in a healthy place, is thinking from a lender’s point of view. Would you want to lend money to someone who is in debt, or often defaulting on regular payments? Probably not.

Reliability, trustworthiness, a clean court record and sensible money management are key aspects to being seen as a borrower worthy of receiving credit. So, try your best to stick to these guidelines and you should be well on your way to a great credit report and first-time approvals for future applications.

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