Most lenders will base their decision whether or not to lend you money on your credit score. So the more you understand about them, the better.
This blog explains everything you need to know about credit scores, including:
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What a credit score is
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Why your credit score matters
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Credit score tips 💡
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What could damage your credit score
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The relationship between mortgages and credit scores 🏠
(For an intro to what credit is, credit reports and how to start building your credit report from scratch, check out this blog.)
What is a credit score?
A credit score is a number based on the information in your credit report. It’s an indication of how reliable a borrower you are and how likely you are to repay any credit you’re offered.
There’s no single, universal credit score. The three main credit reference agencies in the UK (Experian, TransUnion, Equifax) all calculate their own credit scores which are used by lots of lenders, but some lenders also calculate their own credit scores.
All companies that calculate a credit score use different criteria. This can lead to very different scores depending on which company provides the information.
Why does your credit score matter?
Your credit score shows a lender how financially reliable you are based on your track record.
A higher score means you’re more likely to be:
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Accepted for a credit application
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Offered a higher credit limit (how much you’re allowed to borrow)
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Offered a lower interest rate (learn more about interest rates in our Debt pathway).
What is the highest credit score?
This depends on where you get your credit score from. With Experian, the highest score is 999, with an excellent credit score being 961 points or above and a score between 0 and 560 seen as very poor:
Credit score tips
There are many ways to improve your credit score. Here are a few tips:
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Register on the electoral roll
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Maintain a positive track record with a mix of different account types
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Keep a low balance on credit cards and a low credit utilisation rate (the percentage of your credit limit that you actually use). For example, if your credit limit on a credit card is £1,000 but you only use £100, your utilisation rate is 10%
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Avoid having negative entries on your credit report such as bankruptcy or debt relief orders (a way of dealing with debts if you can’t afford to pay them)
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Don’t make loads of credit applications in a short space of time – this makes you seem needy to a lender. It’s best to leave six months between applications
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Pay off your credit card balance in full every month – a well-run credit card can boost your Experian credit score by up to 200 points! (Here’s some info about why just paying the minimum monthly repayment on a credit card isn’t enough.)
What could damage my credit score?
On the flip side, things that could damage your credit score are:
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Having a credit card limit of £250 or less – this isn’t very high, showing a lender that you’re not very trustworthy with larger amounts of money.
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Having more than £15,000 debt on a credit card
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Borrowing more than 90% of your credit limit
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Having only one credit account in your name from the last 18 months
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Missing a payment
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Defaulting on an account (when a lender closes your account because you’ve missed payments)
Top credit misunderstandings
There are lots of misconceptions around credit and credit scores. We’ve cleared up some of the main ones here:
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There’s no such thing as a credit blacklist. Every lender will decide for themselves what your data means to them. Yes, a low credit score makes it less likely you’ll be accepted, but the blacklist is a thing of fiction 👻
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Checking your credit score won’t damage it! Lenders can’t see how often you check it
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Credit reference agencies don’t decide who gets credit – they just provide the information to the lenders, who make their decision
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Being refused credit doesn’t damage your credit score. The only thing that will show on your application is that you made an application, not whether it was successful or not
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As we mentioned earlier, there’s no single credit score
Mortgages and credit
If you want to buy a house and you’ll need to get a mortgage, ensuring your credit score is in good shape should be on your to-do list.
Try not to apply for any other forms of credit in the six months before applying for a mortgage. A mortgage is a huge loan, so if a lender sees that you’ve taken out other debt recently, this might worry them.
All the tips from this blog and our blog about credit reports were taken from the second webinar of our Student Festival of Financial Wellbeing with James Jones from Experian:
Credit scores play an important role in personal finance so give your credit score a bit of love and care and it will positively impact your financial future.
