If you’ve ever applied for a credit card, a loan, or any number of other loan products, you’ll have heard of a credit score. If you’ve wondered what it means and what a good credit score is, you’re not alone.
What is a credit score?
Lenders use the information on your credit report to calculate a score. They use it to decide whether you’ll be able to repay any loans, and therefore whether to lend you money or offer you credit.
As well as disqualifying you from many loans and credit cards, a bad score can also bar you from pay-monthly bills and property rentals.
Your credit score can offer a useful objective measure of your financial health.
How is it calculated?
Every lender and credit reference agency (CRA) uses a slightly different mathematical model to calculate your credit score. They consider several factors including:
name, address, and date of birth;
how often organisations have checked your credit recently; and
public records, including the electoral roll and court records.
The model gives a number, which is your credit score.
Low numbers are bad, high numbers are good. Because each CRA uses a different scale, it doesn’t make sense to give numerical examples of good and bad scores.
You’ll hear regular myths and misunderstandings about credit scores. Despite what many people believe, the following things do not influence your score:
checking your own credit score or report;
requesting quotes on loans (but not applying for them);
the balance in your bank accounts;
your salary, criminal record and medical history;
driving and parking fines;
council tax arrears;
information from more than six years ago; and
the financial information of people who live (or have lived) at your address but who have no financial connection to you.
How can you check your credit score or report?
Because every lender and CRA calculates your credit score using a slightly different model, you have a different score with every lender and every CRA.
In the UK, the three main CRAs are Equifax, Experian and Credit Karma (for TransUnion). Since the European General Data Protection Regulations (GDPR) came into force, you can check your credit score for free on each of these websites.
It’s good practice to check your score and report before you apply for a big loan, if you’re ever declined a loan or credit, and at least once a year.
How can you improve your credit score?
Because your score is a measure of your financial health, improving your financial health will usually improve your score.
Accounts and reports
If you have credit cards you’re not using, close them. Ensure you always pay your bills and repayments on time, never miss a payment, and keep your debts as low as possible. Setting up direct debits for regular payments can make this easier.
On the flip side, if you have normal bank accounts that have been well-managed, hold onto them. CRAs consider the average age of your bank accounts, so try not to change them more than you absolutely have to.
Credit and borrowing
Although it may seem strange, if you’ve never borrowed money or used credit, you’ll have a lower credit score. You can improve this by signing up for a utility with a regular bill to demonstrate that you can cover regular expenses, or a credit rebuilder card.
Don’t apply to lots of different lenders. While you can check your own credit score without impacting it, every time a lender checks it, your score drops.
When you part ways with someone you have financial ties with, for example, a shared bank account, make sure you contact the CRAs and ask for any links to be broken.
If you don’t do this, your ex-friend or partner’s financial affairs will continue to impact your score.
When you move home or change job, your credit score could drop for a while. Try to wait for six months before applying for credit or loans.
And register to vote. Lenders check the electoral roll to confirm your name and address; if you’re not there, it can delay your application.
Correct your credit report
Check your credit report regularly for any errors or unexplained transactions. If you see a transaction or a record that you don’t recognise, contact the CRA and raise a dispute.
If you still have a negative entry on your report for something like illness or redundancy, you can add a short (200 word) Notice of Correction to explain it to lenders.
A good credit score is important if you want a loan, credit, or even a regular bill payment. Every lender calculates it differently, but it’s easy to check and straightforward to improve with a few good financial habits.
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