What is a credit score?
Put simply, a credit score is a three-digit number that rates your creditworthiness. The higher your number is, the more reliable you are considered to be at borrowing and repaying money.
Your credit score could range from ‘poor’ to ‘excellent’ and, although each credit reference agency uses a slightly different scoring model, the numbers should be similar to the following:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
How is a credit score used?
Your credit score is used by banks and other lenders to assess your ability to repay any loans you apply for. This is because credit scores are based on how much you have borrowed in the past, how well you have repaid debt and other information like your job and age.
A credit reference agency compiles this information to calculate your credit score for anyone making the decision to lend you money. It’s important to note that different companies use different tools, which means they may give slightly different scores.
It’s also worth remembering that it isn’t just banks and lenders that use credit scores. For example, landlords and prospective employers can use credit agencies to check your creditworthiness and identity too.
Who are the main credit reference agencies?
There are three main credit reference agencies in the UK. These are Equifax, Experian and TransUnion.
Upon request, these agencies provide your credit report to prospective lenders, landlords and employers to help them verify your identity and determine how reliable you are at borrowing and repaying money.
Each credit reference agency is a separate organisation. This means they record and update information independently from one another. On top of this, each agency has its own scoring system, so your credit score could fluctuate slightly depending on which agency has provided your report.
Why are credit scores important?
If you apply to borrow money, the lender will ask your permission to look at your credit score before proceeding with your application. Once you agree, the lender will look at this score and decide whether to accept your application and how much to offer you.
A good credit score can help you get approval for things like credit cards, mortgages and other loans. This is why credit scores are so important.
How are credit scores calculated?
Credit scores are calculated using a points system based on the information in your credit report. A high score could mean you have managed debt well in the past. A low score could be due to a history of overdue payments.
If you have never borrowed money before, it is difficult for lenders to assess the risk of lending to you – and your credit score will reflect that. So, even though it may seem like you’re managing your money effectively, no history of your ability to repay debt can work against you.
Will checking my credit affect my score?
Checking your own credit report is considered a soft credit check, so it won’t affect your score. Scores and reports also update monthly, so you can check it as many times as you like. In fact, it’s a good way to ensure your personal information is correct.
If you’re looking to apply for finance, there are two types of searches that can be carried out by a lender – a soft credit check and a hard credit check.
With a soft credit check, the lender will only see a top-level view of your financial history that allows them to predict any products and interest rates you may be eligible for. As mentioned, soft credit checks won’t affect your credit score, or your ability to get credit in the future, so you don’t need to worry about how often they’re completed.
A hard credit check will be recorded on your credit file because it gathers more information from your financial history and allows a company to check if you have a record of late or defaulted payments. A hard credit check cannot take place without your permission, so you’ll know when it’s happening.
This guide was adapted from an original article written by Ronica Ruparelia.