Your credit score is really important in the world of finance – if you are considering getting a mortgage, loan, credit card or any other type of credit contract, you will want to get the best deals on the market, but a low score is likely to result in you being rejected for credit altogether, or at least facing higher interest rates on top of your monthly payments, so it’s always worth looking at ways to improve it.
Lenders use your credit score to determine how creditworthy you are, and they will also look at your credit report to decide whether or not they should lend you money.
Simply put, the better your score, the more likely you are to get credit quickly, secure the best deal and get lower interest rates (APR).
So what exactly is a credit score in the UK, how does it work and how can you improve yours? Our guide explains all you need to know.
What is a credit score?
A credit score is a three-digit number that signifies how good you are at handling credit, i.e. whether you pay borrowed money back on time and in full, and it can therefore identify how likely you are to be eligible for loans or other credit applications, as the higher your score, the more lenders will be inclined to lend you money.
It’s worth noting that employers, landlords and utilities companies may also take your credit score into account.
Learn more: Credit Score FAQs
What is a credit report?
Your individual credit score is based on your credit report, which is essentially a record of your credit history, displaying how you’ve managed to pay money back to previous lenders and any other details regarding financial associates and applications you’ve made in the past.
Lenders will usually look at your most recent financial decisions to get an idea of your current situation, but they may also look further back to assess your previous decisions over the last 6 years to get an overall picture of how you repay credit and how much of a financial risk you pose.
If they can see that you have made some poor financial decisions, they will be taking a bigger risk when lending you money, so they may refuse your application or charge you higher interest to account for the added level of risk.
How is a credit score calculated?
In the UK, there are four main credit reference agencies (CRAs) that collect data about consumers’ financial behaviour and they each hold that information securely. They are:
This information is then used by lenders and other companies to determine your creditworthiness.
Each lender has its own eligibility criteria and each CRA has its own scoring system, so it is possible for your score to differ between companies.
Learn more: Credit Reference Agencies - What Are They?
Check your score and get a detailed report from all four CRAs in one place:
What can impact a credit score?
As well as your most recent financial behaviour, the important factors that can influence your credit rating and that lenders will look at include:
- Your payment history – Roughly 35% of your credit score is based on this, and it involves looking at previous repayments you have made (or haven’t made) in full and any late payments. You must repay credit on time, every time, if you want to improve your score or maintain it.
- Your credit utilisation rate – This makes up around 30% of your credit score and it refers to how much of your credit limits you are utilising (how close you are to your limits on credit cards, for example). To work this out, you need to add up the total amount of outstanding debt you have and divide it by your total available credit (credit limits) – then multiply this by 100 to get the percentage figure. E.g. If you have a total debt of £900 with a total credit limit of £3000, the utilisation rate would be 30%. Ideally, it should not be greater than 30%, as the higher your utilisation rate, the more it will affect your score.
- Age of debt – The length of your credit history accounts for about 15% of your credit score. Lenders will look at when you first acquired credit, how long each account has been open and how many different credit agreements you are repaying. A longer credit history with a variety of credit types is preferable to most lenders and can help increase your score, as there is more data available for analysis and, provided you have kept up with all repayments, it can show how reliable you have been with repaying your debts.
- Type of credit – Do you have multiple loans or a credit card and phone contract? Lenders will use this data to determine the risk you present, but be careful – applying for too much credit in a short space of time can be detrimental to your score. This makes up about 10% of your overall credit score.
- New credit – Have you recently applied for lots of different credit agreements with a range of lenders? This makes up the final 10% of your score, and having lots of credit applications on your file can seem like you are desperate or struggling financially, which further increases your level of risk.
The credit score was designed to help lenders manage the risk they are taking when lending money to consumers – without it, they would have no way of telling whether or not you would repay all the money on time.
By looking at the above factors, lenders can make an informed decision as to whether they should give you credit, how much they should let you borrow and what interest rates to charge on top of your monthly repayments.
Lending decisions cannot be influenced by age, race, gender, marital status, address or income, and these factors do not affect your credit score.
Read more: 8 Reasons to Improve Your Credit Rating
How to check your score and get a detailed report for free
You can check your score online with each credit reference agency in the UK, but that is likely to be time-consuming.
Checkmyfile is a multi-agency credit checking website which provides you with a score based on data from all of the four main CRAs; Equifax, Experian, TransUnion and Crediva.
By using Checkmyfile, you will get a more detailed credit report than anywhere else, and it helps you see the information that lenders are analysing and you can also spot any potential errors that may be holding you back from improving your score.
The first 30 days are free and you will be charged £14.99 a month thereafter, but you can easily cancel before the 30-day free trial period if you don’t want to pay for Checkmyfile’s handy credit-checking services. Sign up now:
How to improve your credit score - 10 hacks
Now you know what your credit score is all about and you know the impact it can have on your ability to borrow from creditors, here are some tips on how you can improve yours:
1. Never utilise more than 25-30% of your credit limit if you can help it. Credit utilisation is really important to lenders – if you max out your cards, it may look like you are struggling financially and are dependent on credit, so it will not look appealing to potential lenders and you won’t secure the best deals in the future. If you have a high amount of debt, you should try to pay this off before applying for more credit.
2. Pay back every repayment on time, in full and every single time. Missing payments or paying them late can have a serious affect on your score and it will take you a while to build it back up again.
3. Make sure you are on the electoral roll at your current address – This is used for verification and makes you look stable. It’s also worth noting that moving house regularly can also be deemed as unstable, which can subsequently have a negative impact on your score.
4. Check your credit report regularly and try to negotiate the removal of any negative aspects which may be impacting your score. If you spot any fraudulent activity or notice that there are mistakes on your report, you should be able to rectify them with the respective credit reference agency, but more serious marks on your report made by yourself may be slightly harder to erase.
5. Check your report for any connections with other people or financial associates which have a poor credit score, as this will drag yours down too.
6. If you have any County Court Judgements (CCJs) for debt on your report, this will have a serious impact. If you are struggling with your finances, we highly recommend getting debt advice from a professional debt advice service.
7. Keep hold of your oldest credit card even if you’re not using it. "Old" accounts look good to lenders, as they make you look trustworthy. If you really want to close accounts, go for newer debts.
8. Don’t apply for too many credit accounts in a short period of time. This makes you look desperate and comes across as though you are struggling financially, so it increases the level of risk you pose.
9. Where possible, use eligibility checkers for credit cards before applying for credit, as these involve a "soft search" on your credit report – leaving little or no trace. If you apply for credit but get refused due to your score, this will leave a “hard search” on your file and will reduce your score.
10. Don’t withdraw cash from a credit card – This looks like poor money management and usually incurs higher fees.
These are great tips that do work and will help to improve your credit score as quickly as possible, but bear in mind that it can take a couple of months to increase, depending on what is holding your score back.
If your credit score is low at the moment then the change will not happen overnight – but keep applying these tips and with careful management and by regularly checking your score, it will improve.
Credit score membership
If you want to keep tabs on your finances and regularly check your score, you can sign up to a credit-checking website which will show you your score and report, as well as provide expert advice on how to improve it and prevent it from dropping.
As recommended above, Checkmyfile uses information from all CRAs in the UK, making it easier for you to see everything in one place.
It also offers free identify fraud assistance if you should ever become a victim to this, as well as advice on what could be affecting your score.
Get your free 30-day trial by tapping the button below.