Credit scores explained
Your credit score (sometimes called your credit rating) is important as lenders use it to help decide if they’ll give you a loan or credit, how much they’ll lend you and how much interest they’ll charge you.
So, if you’re looking to take out a credit or store card, a loan or mortgage or any other type of credit, the better your credit score the more chance you have of getting a good deal.
What is your credit score?
Your credit score is based on your credit history as well as other factors. When you apply for credit, the lender checks your credit file with one or more credit reference agencies, and will also look at your application plus any other information it holds on you to help it come up with a credit score for you.
There are three main credit reference agencies in the UK (Experian, Equifax and TransUnion) and each of these holds a credit file on most UK adults. Your credit file includes information about credit or borrowing you currently have and whether you are up to date with your payments, as well personal information, such as your current and previous address(es).
Credit reference agencies may also calculate your credit score. However, the credit score you get from one credit reference agency may be different to the score you get from another agency. That’s because they may hold different information about you and may have a slightly different way of interpreting that data. They also use a different scoring scale.
For example, Experian’s credit score range is from 0-999, Equifax’s is from 0-1,000, while TransUnion’s is 0-710.
What affects your credit score?
A range of factors can affect your credit score and one lender or credit provider may give you a different score to another, based on the same information. The factors that can affect your credit score include:
- Having no or little credit history. If you’ve not borrowed in the past, lenders won’t be able to look at your track record of repayments so this can lower your credit score.
- Being close to your credit limit. If you’re close to the limit in terms of what you can borrow on your credit card(s), lenders may think you cannot manage without that level of borrowing, which could reduce your credit score.
- Missing payments. If you miss a payment, this is likely to affect your credit score. Making your payments on time could boost it.
What information does your credit report contain?
Your credit report has information about you and about your credit or borrowing agreements. It typically lists:
- Any credit arrangements you have such as bank and credit card accounts or loans and utility company debts. It’ll show if you make your repayments on time and if you’ve missed or been late with any of your repayments. This information may stay on your credit file for six years.
- Details of anyone you’re financially linked to, such as anyone you’ve jointly taken out a loan with. It doesn’t include details of anyone you live with or are married to if you don’t have a joint mortgage, joint loan or a joint bank account with an overdraft facility.
- Any county court judgments (decrees in Scotland) against you, as well as if you’ve had your home repossessed, been made bankrupt (sequestration in Scotland) or had any individual voluntary arrangements. These can stay on your report for six years.
- Any bank overdrafts you have.
- If you’re on the electoral register.
- Your name, date of birth, current and previous addresses.
- If you’ve committed fraud.
Your credit report doesn’t include details of your salary, religion or any criminal record you might have.
Employers and landlords can also check your credit report, although they’ll usually only see public record information such as your details on the electoral register, if you’ve been insolvent or have any county court judgments against you.
Utility companies, insurance providers and mobile phone companies also may check your record if you want credit from them (such as paying your bill in arrears) rather than paying upfront.
How to check your credit report
All credit reference agencies are required by law to supply you with a free copy of your credit report. You can get your credit report direct from Equifax, Experian and TransUnion. You can find out more about how to do this from the Information Commissioner’s Office.
It’s often worth getting a copy from all three of the main agencies if you’ve not applied for credit before or haven’t checked your credit report recently. This is because each agency may hold different information on you.
You can also get a more detailed credit service (including your credit score) from the credit reference agencies. You can usually get a free trial of the service (typically 30 days) and after this you have to pay a monthly fee for the service. For more details contact the credit reference agencies direct.
How to correct mistakes on your credit report
If you find any mistakes on your credit report you can raise a dispute with the credit reference agency. It will contact the company that recorded the information – this could be a loan or credit card firm. While it carries out an investigation, a marker should be put on the information so that if you apply for credit elsewhere prospective lenders know the information is disputed. If you're unable to resolve the problem contact the Information Commissioner’s Office, which is responsible for ensuring that information held about you is handled properly.
You can also complain to the Financial Ombudsman Service if you’ve already complained to the credit reference agency and you’re not happy with its response. Before you can do this, you must have given the company eight weeks from when you complain to investigate and get back to you.
How to improve your credit score
The better your credit score the more likely you are to be offered a loan or credit at a reasonable rate. There's no easy way to do this but there are things you can do to make your score as high as possible.
- Start by making sure the information in any loan or credit application and with the credit reference agency is complete and accurate. Discrepancies can lower your rating and make it less likely you’ll get credit.
- Pay your bills on time.
- Make sure you’re on the electoral register as this will boost your credit score. You can check with your local Electoral Registration Office if you are registered to vote. To find your local office visit the gov.uk website. Also, the longer you’ve been at your address, with your bank and in your job, the better your credit score is likely to be.
- Lack of information on your credit report can also lower your rating. Ideally, lenders want to see how you’ve handled credit in the past, so if you haven’t taken out loans or other credit in your name, you may have little or no credit history, and this can result in a lower credit score.
- Removing people you’re no longer linked to financially may also help. For example, your credit file may have become linked to your partner’s while you had a joint loan for a car. However, once the loan has been paid off, you can ask the credit reference agency to remove the financial link. If your partner’s credit score is worse than yours, being financially linked to them in this way could reduce your credit score as well. You can ask the credit reference agency to remove the financial link.
What to do if you have no credit history
It’s much harder to have a good credit score if you have no credit history. There are several reasons why you may not have a credit history. Perhaps you have just turned 18 (which is the legal age for taking out a credit agreement), maybe you haven’t borrowed in the past or not for a number of years, or you may have moved to the UK from abroad.
Whatever the reason, there are several ways you may be able to improve your credit score.
- Pay your regular bills on time. If you have a pay-monthly mobile phone contract or pay for your energy bills by regular direct debit, these will show up on your credit file. Paying these bills on time could help build your credit history.
- Register to vote on the electoral register. This can help improve your credit score.
- Build your credit - slowly. Some experts recommend taking out a credit card as a way of improving your credit score. However, it isn’t without risk. It will only improve your credit score if you make the repayments on time, and it’s probably best for your own finances if you pay off what you borrowed in full each month. One option might to put a regular expense, that you would normally pay by debit card, on your credit card instead and pay it off in full every month.
