Credit score checker

Money Savvy

Understanding your credit score and how to improve it

1st February 2021

Try as we might to manage our money smartly, personal finance can be an extremely tricky balancing act. With so much jargon within the industry that feels like it’s been purposefully used to confuse us.

One such area of confusion is credit scoring. While it’s a term that’s used liberally across the industry, it isn’t often given a thorough explanation or discussed at length, so it’s easy to feel left in the dark where your credit score is concerned. Given the importance and ubiquity of the term, there should be more done to make people aware of what their credit score means, how it is calculated, what affects it and how – if needed - it can be improved.

There’s no need to feel anxious when it comes to personal finance, and there’s no such thing as a stupid question – so here, jargon free, is a guide to credit scores.

What is a Credit Score?

Your credit score is an evaluation of how credit-worthy you are based on your previous credit history. This is given as a number, and essentially, the higher the number, the better your credit score. This personal number, amongst other factors, also determines how trustworthy you are to lenders as it helps them to measure how likely it is you’ll be able to pay back what you owe them.

Your score is a number assigned by Credit Reference Agencies (CRAs) using the information on your credit file. In the UK, there are three main CRAs: Experian, Equifax and TransUnion, each with their own way of scoring without prejudice.

Having a good credit score will affect any application for a credit card, finance, loan or mortgage, and is one of the most important pieces of financial information you can have. It can be extremely limiting to have a poor score if you’re wanting to make any kind of long-term investment like a mortgage or a large purchase.

Your credit score is an important part of your financial health as it opens up more opportunities and makes getting credit easier. Some of the main benefits of credit building include:

  • Better chance at getting approved for a credit card, mortgage or loan

  • The ability to raise your credit limit

  • Lower interest rates

A credit score technically isn’t the same as a credit rating, but they are used for similar purposes and often used interchangeably. A ‘credit rating’ is also used to assess how credit-worthy something is, but often graded as a letter and instead applies to a group, business or even a government, rather than an individual. For the purposes of this guide, you don’t need to worry about that.

How to Check Your Credit Score?

Everyone has the legal right to check their credit score and it is definitely worth being aware of so you can work on building your score if it’s less than you’d like. Checking your own credit score doesn’t affect it, so feel free to check as often as you want.

Websites like ClearScore can provide you with a monthly report for free. If you’re willing to pay, all three credit reference agencies (Experian, Equifax & TransUnion) offer comprehensive services which provide unlimited access to your credit report, a credit score and alerts when changes are made to your report.

What is a Good Credit Score?

In general, the higher the credit score the better, with larger numbers corresponding to a higher likelihood of repayment, which will obviously be advantageous to the lender. Applicants with a good credit score generally qualify for larger amounts with lower interest rates, while having an excellent credit score opens up even more lending options.

As a guide these are the scores considered to be good and excellent.

  • Experian: 881 to 960 is Good, 961 to 999 is Excellent
  • Equifax: 420 to 466 is Good, 467 to 700 is Excellent
  • TransUnion: 604 to 627 is Good, 628 to 710 is Excellent

What is a Bad Credit Score?

You may find you have a bad credit score if you’ve missed payments on loans, credit cards or bills, been declared bankrupt or only been able to make the minimum payments on your debts. Thankfully, a bad or poor credit score isn’t the end of the world as there are plenty of ways to fix it. It is important to remember, however, that this will take time and patience.

As a guide these are the scores considered to be poor and very poor.

  • Experian: 561 to 720 is Poor, 0 to 560 is Very Poor
  • Equifax: 280 to 379 is Poor, 0 to 279 is Very Poor
  • TransUnion: 551 to 565 is Poor, 0 to 550 is Very Poor

What Affects a Credit Score?

Whether you have a good credit score you’re wanting to maintain, or a score that you need to improve on, it’s worth knowing what counts against you so that you can amend and adjust your behaviour accordingly.

Essentially, it can negatively impact your credit score if you fall behind on repayments. The most common mistake is missing payment deadlines on the agreed date of the month. This can happen in many different forms and if it becomes a persistent issue, there are measures that lenders can take which will then go on your credit records and count against you for a longer period.

The actions they take can include things like registering a default or a county court judgement against you.

Here is a rundown of the types of things that can affect your credit score, how you can manage them and, if needed, how you can go about improving them and increase your chances of getting approved for credit.

Payment History

This is the largest factor in determining your score as it measures how consistently you’ve managed to pay loans, credit cards and regular bills on time. It goes without saying, then, that late payments or missed payments will negatively impact your record in this regard. Only paying your minimum payments can also affect it. By ensuring that you’re only taking on services you can afford and settling those bills on time, you will improve your score over time.

It’s worth noting that student loans don’t have any impact on your credit rating.

Number of accounts

This measures how many credit-dependent accounts you have open at any one time. Considering how many of these accounts have a balance on them, this can be a factor in determining your score. It is far better to have more zero-balance accounts than carrying a balance across multiple lenders.

Credit mix

This looks into the variety of credit you have available – are you signed up to several loans, have more than one bank credit card or a collection of store cards? This is a way of evaluating your credit habits to give a better picture of your spending and behaviour where credit is concerned. If you have a range of credit types (credit card, car loan, mortgage) it could be looked on more favourably than having a lot of just the same type (all retail cards, for example).

History of credit use

Using your historical activity and behaviour to gain a better idea of how you may act in the future, your score factors in how long you’ve had credit accounts open for, how many and the dates of your oldest and your newest. This also considers the average age of your open accounts, too. As a rule of thumb, a longer credit history is more advantageous than a shorter one if you want to be accepted for credit.

Credit utilisation rate

This looks at the total amount of credit you have available - which is based on your credit card limits – against how much of the credit you’re using. A low credit utilisation rate alludes to better management of credit, and lenders will typically prefer a ratio of 30% or less where possible.

Here are a couple of tips to improve utilisation:

  • If you trust yourself not to overspend, consider requesting an increase in your credit limit to keep your utilisation low.
  • If financially possible, pay back your credit cards in multiple micropayments (small, manageable payments) throughout the month helping keep your credit card debt low and boost your credit score.

Negative Information

These are pieces of information about your financial history that show you in a more negative light. Situations, such as a bankruptcy or arrears on your existing credit may drag down your score depending on the degree of severity of what is found. However, your credit score can be rebuilt over time with improved financial management and behaviour.

Being a guarantor

Being a guarantor for someone else’s credit application can affect your credit score. If the borrower cannot afford their repayments and you have to cover it, or if the loan falls into default and the outstanding payments become yours, this will be put on your credit report. Fail to repay this and your credit score will be impacted.

Hard and Soft Credit Checks

There are two different types of credit searches: soft and hard credit checks. Soft credit searches will show on your credit file but they won’t be visible to other lenders ,so you don’t need to worry about whether they affect your score or if lenders can see this. For example, our eligibility checker for loans uses soft checks to determine whether you’re eligible, but if you decide to start an application, that will require a hard credit check.

Hard credit searches will leave marks on your credit file. Too many hard checks over a short period of time can affect your credit score for six months, which lenders can see and may label you a greater credit risk, decreasing your chances of getting approved for credit. The more credit applications you make, the greater negative effect it’ll have on your credit score. For example, if you apply for multiple credit cards, credit card providers can check your credit files and see this, and as a result, may reject your application.

How to Improve Your Credit Score?

Luckily, if your credit check reveals a less than ideal score, improving this is far from complex and easy to manage once you’ve settled into a routine and made the necessary changes to your behaviour without needing to pay for credit repair services. Improving credit scores takes time and is a long-term process. Advice that claims quick fixes are, unfortunately, more likely to backfire than be helpful.

The first step to boost your credit score, quite obviously, is to always pay your bills and mortgage payments on time, in line with the agreement in place with your lender. This also includes things like mobile phone contracts, car finance and credit card repayments. Having a reliable and consistent payment history is the backbone of any high credit score. The next step would be to keep down your credit balance on any account as this will better your credit utilisation ratio, so paying off your debt is a great way to improve.

You can improve your ​​Experian credit score by using Experian Boost which lets you share information about your regular spending, such as Council Tax payments, and digital subscription payments like Netflix and Spotify to determine whether you’re eligible for a boost.

Other suggestions include

  1. Register on the electoral register. In other words: register to vote!
  2. Start paying your bills on time. It may sound obvious, but it’s the best way to prove you’re trustworthy. Pay off those balances.
  3. Apply for and use a credit builder card. These are credit cards for bad credit which have low limits and high interest but are a good way to prove you can make repayments regularly and build your credit score.
  4. Purchase with a credit card little and often. You’ll want to keep your credit card active and make regular repayments to prove you can reliably pay back whatever you borrow.
  5. Check for credit file mistakes. Double check all your personal details are correct and up-to-date.
  6. Check for fraudulent activity. If the activity on your credit file doesn’t look right, someone may have applied for credit in your name (identity theft) so you’ll want to contact the CRA. In particular, check your unused credit cards and store cards.
  7. Cut ties with former joint accounts. If you’re no longer with someone and have an account linked, unlink yourself to avoid suffering from their poor credit rating.
  8. Space out your credit applications. Frequent applications for credit cards and loans that use hard searches in a short space of time can make you look desperate to a lender so try to wait before applying again if it isn’t urgent.
  9. Add your name to bills. Check that your name is on all the bills you pay, from energy to phone bills. Add it on if it’s not, as this will go towards your credit score.

How Long Does it Take to Improve your Credit Score?

If you’re actively credit building, you have to be patient - you probably won’t see massive changes overnight. Changes to your credit information can take several weeks to appear on your credit report and affect your score. New accounts also need time to mature (potentially for a few months) before they’re a valuable credit builder.

Paying your repayments on time each month is a steady way to improve your credit, but if you miss a payment or default, this will stay on your credit report for six years.

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