Understanding your credit score
As something that can affect your ability to borrow, credit scores can seem complicated and hard to get your head around. Broadly speaking, they’re used by lenders to determine whether they should give you credit or loan you money. For example, banks, credit card companies, mortgage lenders, mobile phone companies and even insurance providers that take payment via Direct Debit use credit scores to determine how likely you are to be accepted for credit.
They’re looking for someone who’s low-risk, meaning they will be able to meet the repayments. But what makes up a credit score and what can impact it? We’ve answered these questions and more in our illustrated guide to credit scores.
Why would a company perform a credit check?
Credit comes in many forms, including credit cards, personal loans, overdrafts, utility bills, mortgages, mobile phone contracts, as well as paying for goods in monthly instalments (e.g. a new car or laptop).
Companies that provide such services want to make sure that you’re likely to make the repayments on any loans or credit that they provide. They use your credit score to determine whether to provide you with credit. The score is a three-digit number that is a record of your lending, credit and repayments in the past.
How does credit scoring work?
In the UK, credit scores are calculated by three main credit reference agencies (CRAs) – Experian, Equifax and TransUnion. To calculate your credit score, CRAs are sent information about your credit and how you handle it by lenders. Other things that might affect your credit report include not being registered on the electoral roll and moving home frequently.
How to check your credit report
By law, all CRAs must provide you with a free copy of your credit report on request, which can be accessed online. You can also ask for a written copy. It’s a good idea to get one from all three CRAs as they might have information from different credit providers or lenders.
Before you decide to take a leap onto the property ladder you’ll need to make sure your credit score is in good shape. There’s no point saving a great deposit only to find out that you can’t get a mortgage because your credit score is too low. It can seem quite daunting initially but there are some super easy ways to improve your credit score before you buy a house. Read more
Improving a poor credit score
Having a poorer credit score might mean that you’re seen as high risk. For example, your score could be poor if you’ve defaulted on a previous debt or not paid bills on time. As a result, lenders might reject your credit application or offer you a higher rate of interest.
However, there’s no need to worry just yet as there are plenty of steps you can take to improve your credit score. The Money Advice Service offers the following tips:
- Pay bills on time
An effective way to prove to lenders that you’re capable of managing your finances.
- Existing debt
It’s a good idea to try and eliminate any outstanding debts before applying for credit.
- Register on the electoral roll
It’s much harder to get credit if your name’s not on there.
- Check for mistakes on your file
Something as small as a slightly wrong address can impact your score.
- Check for fraudulent activity
If any activity on your credit report doesn’t apply to you (i.e. someone applied for credit in your name), contact the credit reference agency to let them know.
Have a look at our guide below for helpful tips on understanding your credit score and how to manage it.