Your credit score is often seen as the key that could unlock access to cheaper borrowing and bigger loans. But what is your credit score? Who decides it? And what factors affect it?
Your credit score is simply data that summarises your borrowing history.
When you make an application for a loan, credit card, mortgage or other type of credit (like a new mobile phone account), lenders will look at your credit score. They will use this information alongside details you have provided in your application to decide whether or not to approve it.
Credit scores are calculated by credit referencing agencies. The three main agencies used by lenders in the UK are: Experian, Equifax and Transunion.
Credit scores give lenders an indication how responsible a borrower you are likely to be, based on your recent borrowing history. In other words it will help them work out whether you’ll make repayments in time and in full or whether you’re more likely to make late payments or skip them altogether.
Different lenders will interpret the same data in different ways. This might seem confusing but the upside is that it means that if one lender turns down your application another might say yes.
It’s important to check your credit score regularly to ensure it is accurate and up to date.
Each of the three credit referencing agencies must provide you with a free copy of your credit report including your credit score.
As each will hold different information it’s best to check your credit score with all three. This can be done on their websites, or you can contact them and ask them to send you your report in the post.
In addition to providing you with your score, credit referencing agencies like Experian can also help you understand how your credit history could be interpreted by lenders and give you useful information about how to improve your credit score.
Usually, a higher score means you're seen as lower risk - meaning you're more likely to get credit, and at better rates. However the three different credit referencing agencies have different scoring systems.
The table below shows what is an excellent, good and fair score with each of the three main credit referencing agencies in the UK.
There are a number of ways you can improve your credit score:
Check your credit report regularly. Make sure it's up to date and holds accurate information. Contact the relevant lender or your credit score provider if anything needs amending. Even small details like the way your name and address is recorded can have a significant impact. If it isn’t possible to amend your report you can add a brief ‘notice of correction’ where you can explain what has happened.
Register to vote at your current address, as lenders use the electoral register to help confirm who you are and where you live.
Stay within your credit limits and make repayments on time. Missed or late payments will stay on your credit report for 6 years.
Don’t chop and change accounts. Credit scoring can also look at the average age of your accounts, awarding extra points for long-standing relationships.
Don't make lots of credit applications over a short period. Each application shows up on your credit report, and frequent applications may suggest you have money problems or be a red flag for fraud.
Check your credit utilisation. This is the percentage of the credit you have access to that you are using. If you have several credit cards and overdrafts, it can be easy to lose track of just how much credit you have available and if they are all maxed to the limit a lender is likely to think you aren’t in control of your finances. Experian recommends keeping your credit utilisation below 30%.
How much difference these actions will make may vary between agencies, but as an example Experian says registering on the electoral roll will add 50 points as will not applying for any new credit in a 6 month period. Holding the same credit card for 5 years will add 20 points.
By contrast missing a regular payment will cost you 130 points, while defaulting on an agreement will cost you 350 points. At the less severe end of the scale, using more than 90% of your credit card limit will lose you 50 points, as will having a balance of more than £15,000.
Total available credit is factored into some people’s scoring systems - lenders tend to get twitchy if you have access to the equivalent of more than your annual salary in credit cards and overdrafts for example.
The problem here is that there’s a fine balance to maintain between total available credit and credit utilisation.
One the one hand, having five cards with £5,000 credit limits and only £1,000 borrowed on each is a great position to be in - it means your credit utilisation score is at 20%, close to the ideal.
However, if that’s more than your annual salary, it might make lenders think you have too much available credit - so worry about lending to you.
On the other hand, having just two cards, with £5,000 limits and £2,500 borrowed on each means your total available credit is in a far better position, but your credit utilisation score is far worse at 50%.
Of course, ideally you’d have low credit utilisation as well as a reasonable amount of total credit too, but if not it’s one to watch.
Cancelling unused cards is a quick way to bring your total available credit down - but carries its own risks. That’s because lenders like to see a long history of credit - so if cancelling cards means you no longer have an account you’ve held for two or more years, you could lower your score again.
The safest plan if you’re worried your total available credit is on the high side is to ask for lower limits on seldom-used cards or overdrafts.