How important is your credit score?

What is a credit score?

Your credit score is a number used to represent your creditworthiness. Creditworthiness means your ability to repay any money you’ve borrowed and is a way for lenders to assess how likely you are to repay your debts on time. 

Your credit score is worked out based on the information contained in your credit report, which includes whether you’ve paid back credit in the past, any current accounts you have, how reliable you are at paying your bills and some other financial information.

Your credit history, credit rating and credit report are all related to your credit score, but they each mean something slightly differently.

Your credit report summarises your credit history. 

It includes:

• Personal information - your name, date of birth, current and previous addresses and any other information available on the electoral roll (what you submit when you register to vote).

• Credit accounts - any previous or current credit accounts you have, such as loans, mortgages, credit cards and overdrafts and what the balances are.

• Payment history - whether you consistently make payments on time and in full; whether you’ve had difficulties paying your bills or credit repayments either now or in the past and whether you’ve missed or made late payments.

• Who you’re linked to financially - if you have joint accounts, such as current accounts, savings accounts, credit cards or mortgages, you’ll be considered financially linked and their creditworthiness could impact yours.

• Public records – for example whether you’ve been bankrupt, had an IVA (Individual Voluntary Arrangement), or CCJ (County Court Judgment). These usually have a significant impact on your creditworthiness.

• Credit searches - when you apply for any credit product, the lender will run a hard credit check. This is recorded on your credit report and can be seen by other lenders and financial institutions. Lots of credit checks in a short period can make it look like you’re becoming reliant on credit and be a warning sign for lenders.

Your credit score is a number that summarises all of this information to assess how likely you are to repay your debts on time. It can change monthly based on your latest borrowing history. 

You don’t just have one credit score. The UK has three leading credit reference agencies: Equifax, Experian and TransUnion. They are responsible for collecting and maintaining all the information in your credit report and providing you with your credit score. 

Your score will fall into one four categories - Bad, Fair, Good or Excellent. Each credit agency uses a different scoring scale, but your category is likely to be the same across all of them as they use similar information to generate it.

Why is it a good idea to check your credit score regularly?

There are several reasons why keeping an eye on your credit score is important. These include:

• Accuracy - You want to make sure that there are no mistakes on your credit report. Errors could have a negative impact on your creditworthiness, meaning you could be declined for credit if you need to borrow money in the future. If you spot any inaccuracies on your credit report, contact the credit reference agency as soon as possible to get your report corrected.

• Identity theft - Monitoring your credit report can be a good way to detect signs of identity theft or fraudulent activity. If you see unfamiliar accounts or hard credit searches on your credit report, it could indicate that someone is using your identity to apply for credit. By spotting these issues early on, you could minimise the damage to your credit history and can take steps to avoid further fraudulent activity. 

• Improve your credit score - By regularly checking your credit report, you can see what factors influence changes in your credit score. Being aware of these will mean you can take steps to help boost your credit score, so you’ll have access to the best deals. 

• You’re ready when you need credit - If you decide to apply for a loan, mortgage or credit card in the future, you’ll already understand how lenders will see your creditworthiness. You’ll be aware of your chances of approval, and you’ll be able to improve your credit score before applying for credit if you think your chances of being approved are low.

• Smarter financial decisions - Checking your credit report more often can help you make smarter financial decisions that will boost your credit score in the future.

• Access to the best deals - Having an excellent credit score means you’re more likely to be eligible for lower interest rates, higher credit limits and premium credit card deals. This means you’ll save yourself money in the long run if you decide to borrow money. 

How do I check my credit score?

You can check your credit score for free using websites and apps like ClearScore, Credit Karma and Experian. You can also get your credit report directly from the credit reference agencies. All credit reference agencies must provide you with a copy of your credit report for free by law. 

There are also paid apps that provide credit monitoring services. They often recommend credit products you’re likely to be accepted for and offer guidance and tips on boosting your credit score. 

You can check your credit report as often as you like without damaging your credit score. When you check your credit score, you’re performing what’s known as a ‘soft search’, which is only visible to you and not lenders or other financial institutions.  

What is considered a good credit score?

Each credit reference agency will have its own scoring model but will define you as having either an ‘Excellent’, ‘Good’, ‘Fair’ or ‘Bad’ credit score. Equifax credit scores range between 0-1000, Experian ranges from 0-999, and TransUnion scores range between 0-710. 

Here’s what is considered to be a good and excellent credit score by each agency:

*Equifax has good, very good and excellent categories; a score between 671-810 is considered very good. 

What is considered a bad credit score?

There could be several reasons that you have a bad credit score, such as regularly missing or making late payments, being turned down for lots of credit in a short period of time, or because you have never used a credit product before so you have no credit history. Here’s what each credit reference agency considers to be bad and fair credit scores:

How can I improve my credit score?

There are a number of steps you can take to boost your score and get access to better deals on financial credit products. It’s important to be aware that improving your credit score is a gradual process – there’s no quick fix, and you’ll need to put in place responsible financial habits over a long period of time to see a significant difference.

Here are some things you can do to help boost your credit score over time:

• Pay bills/make credit repayments on time and in full - consistently paying the money you owe on time is one of the most critical steps in building and maintaining a good credit score. This is because it demonstrates you’re a responsible borrower and likely to make future repayments on time too. 

• Keep your credit card utilisation low - credit card utilisation refers to how much of your credit limit you’re using. If you max out all of your available credit (e.g. the total amount you can borrow on a credit card), it can appear that you’re struggling financially. Ideally, you should aim to stay within 25% of your credit limit.

• Avoid multiple credit applications in a short period of time - every time you apply for credit, the lender will run a hard credit check. This is visible to other lenders and having multiple hard credit checks in a short period could make it appear like you’re in financial difficulty. A good benchmark is to try and make no more than two credit applications every six months.

• Keep old accounts open - showing lenders that you can sensibly manage credit products over a long time can have advantages. It is therefore recommended not to permanently close your accounts even if you’ve stopped using them. 

• Monitor your credit report - keep an eye on your credit report for any inaccuracies. If you spot any mistakes, contact the relevant credit reference agency as soon as possible to correct them. 

• Don’t use a credit card to withdraw cash - using a credit card to withdraw money from a cash machine gives lenders the impression that you’re in financial difficulty. You’re also likely to be charged a fee for doing so, so it’s a good idea to avoid it altogether. 

• Register to vote - even if you don’t plan on voting, being on the electoral roll helps to confirm your fixed address. Whilst most of the above strategies require consistent improvement over a long time, registering to vote can lead to an easy and quick credit score boost.

Why is your credit score important?

Your credit score can impact several parts of your life, such as:

• Your ability to access credit - If you need to borrow money, your credit score will affect how much you can borrow and the interest rates you’ll be charged. The better your credit score, the less you’ll likely have to pay to borrow money. 

• Your ability to rent a property - when you apply to rent a property, your landlord or the property management company may check your credit report. If your report shows you regularly miss or make late payments, you may be seen as a risk for paying rent. This could mean it's less likely they will accept your application.

• Your ability to get on the property ladder - If you want to buy a house and apply for a mortgage, your credit score will affect if you can get a mortgage and how much you’ll be charged. Like with loans and credit cards, your credit score will impact how much you can borrow and how much it will cost you in interest.

• Your ability to get specific jobs - occasionally, potential employers will ask permission to see your credit history as part of your application process. They’ll do this to assess your financial responsibility or to judge your reliability and integrity around finances. This is more common in jobs within the financial services sector or which involve significant financial responsibilities.

• The cost of utilities - the companies that provide services such as gas, electricity, mobile phone contracts and internet, may review your credit history as part of your application. You may not be able to get a phone contract if you have a bad credit score, and you may have to pay a deposit or higher upfront costs for other utilities, like broadband.