You’re more than likely familiar with the term ‘credit score’. And you’re probably aware that it can have an impact on your chances of borrowing. But what exactly does it mean and what ‘score’ should you be aiming for?
Well, fear not. With our ultimate credit score guide, you’ll soon discover; what a credit score is. What is classed as a good score. And how you can improve it.
What is a Credit Score and What is a Credit History?
A credit score is a three-digit number from 0 – 1000. That is set by a credit reference agency in the UK. This shows how reliable you are with borrowing credit and repaying it back. Depending on your score, it will be classed as excellent, good, fair, or poor.
The higher the score, the better chance you have of being accepted by a lender and getting the best deals. What a lot of people don’t know is that your actual score is not primarily used by lenders. They use a variety of factors to determine what you can borrow and at what rate.
There are three main credit reference agencies in the UK: Experian, Equifax and TransUnion. Each one has its own credit scoring system, so you’ll get a different credit score number rating from each one.
They will then create a summary of the type of borrower you are and how likely it is that you’ll pay your credit back on time. They will then translate this into a figure, which gives you your credit score.
Your credit history is used by lenders to assess your creditworthiness. it impacts the financial products you’re offered, as well as the rates you’re given. You will be assessed when you apply to lenders for products such as mortgages, personal loans and credit cards.
What is a Good Credit Score?
What is classed as a good credit score will differ across the credit reference agencies. They all use different scoring systems, which can make things a bit confusing.
However, the higher the number, the better your score. For example, with Experian, if you have a score between 881 and 960, it’s classed as a good credit score. Whereas Equifax consider anything between 671 and 810 very good and anything above 811 as excellent.
It’s important to remember that lenders will look at the whole picture. Not just that one number, and they’ll each have their own criteria. What one lender might consider vital in determining whether you can borrow from them or not, another one could see as less of an issue.
That doesn’t mean you should make multiple applications if you get rejected from one provider though, as we’ll explain in more detail later.
So, what is a bad credit score? Well, similarly to good scores, there’s not one specific number you should be aiming to get above. However, as a guide, the lower the number, the poorer the score. Experian class anything between 0 and 560 as very poor while with TransUnion the range is between 0 to 565.
How to Check Your Credit Score?
There are many sites out there that let you check your basic credit score for free, by signing up to an account. This includes the credit reference agencies as well as third parties. Some providers offer credit monitoring services so you can keep tabs on your score regularly too.
You can also request details of any credit you’ve taken out in the past through your bank or via other lenders. This means you can track your borrowing yourself, though this might mean a bit more work on your part.
Factors that Affect a Credit Score
There are many factors that will impact your credit score, including the following:
- How many accounts you have and the type of credit you’ve borrowed
- Your previous credit and payment history
- Your used credit and any available credit on your accounts
- New credit applications
If you’ve taken out lots of credit in the past and failed to make payments on time, you’ll have a lower credit score than someone who has been more responsible with their borrowing. At the same time, if you regularly max out your credit cards and only manage to pay the minimum each month, that will negatively affect your score.
Another common issue is making too many applications for new credit in a short space of time. If you’re rejected by one lender, making multiple applications to other loan or credit providers will go against you, especially if you’ve not taken steps to address the underlying issues.
Which is why it’s not recommended to keep trying your luck in a short period of time!
Does an Overdraft Affect Your Credit Score?
In a nutshell, yes. But it depends how you use it. If you go into your overdraft each month and you’ve not arranged a limit with your bank, it can negatively impact your rating as it suggests you’re not responsible with your finances.
However, if you arrange an authorised limit and you only use a minimal amount infrequently (and pay it off), it’s less likely to damage your score.
Does a Soft Search Affect Your Credit Score?
Soft searches can be a useful way of finding out if you’re likely to be approved for credit without actually delving into the details. They’re usually done based on details you provide and are not verified with a formal check. Therefore, lenders won’t see them on your file, and they won’t affect your credit score.
Does Having No Credit History Affect Your Score?
This is a common issue for many people who can sometimes find themselves stuck in a cycle of not having credit and not being able to get credit. If you have a lack of visible credit history, it’s difficult for lenders to know how reliable you’ll be as a borrower so your score could be lower.
There are ways to build up your credit score though, which can help combat this classic chicken and egg problem.
What Credit Score do you Need for a Mortgage?
One of the largest types of credit you can take out is a mortgage, therefore many people will wonder what credit score they’ll need to be able to get one.
As with any other types of credit, the higher your score, the more chance you might have of being able to borrow (as well as getting the best deals), but there’s no specific number you should be aiming for.
However, lenders will also take into account other factors as well as the actual figure when you apply for a mortgage including your earnings, employment, deposit amount and monthly spending.
How to Improve Your Credit Score?
If you’ve discovered your rating is less than perfect, you might want to know the quickest way to improve your credit score. However, it often takes time to increase your credit rating so it’s a good idea to have a plan in place for the longer term to help get you in a better financial position.
As a starting point, some of the best ways to improve your credit score are:
- Get yourself on the electoral register – This is pretty quick and easy to do online if you haven’t registered already.
- Make repayments on time each month – Paying late or missing payments altogether will have an effect on your credit score, so keeping on top of these will put you in a better position to improve your score.
- Pay more than the minimum on outstanding debt – It might be tempting to pay off only the bare minimum each month, but this means not only will it take longer to clear any debt, but it will also show lenders that you might struggle to make repayments. Which, in turn, makes you a less attractive customer.
- Clear as much debt as possible – This sounds obvious but before applying for more credit, make sure to clear what you can of the debt you already have.
- Check your report for mistakes – Errors can occur so it’s wise to check your credit report and query anything that doesn’t add up.
Does Car Finance Improve Your Credit Score?
While taking out any finance to fund a large purchase can have a negative effect on your credit score, if you pay it off in a responsible way, it could actually help improve your rating over time. However, it’s worth remembering that you might only get better rates if you have a decent credit score to start with.
So, if you’re looking to take out car finance just to improve your score, it might be better to consider another option.
Do Direct Debits or Credit Cards Improve your Credit Score?
Again, as long as you keep up with the agreed repayments, you could boost your score with direct debits or credit cards as it could show lenders that you’re a trustworthy customer who can manage their borrowing. However, maxing out cards and paying very little off the balance will have the opposite effect.
The main point to remember with any type of borrowing, whether that’s a credit card, a loan or a line of credit, is to make sure you can afford the repayments and try and avoid getting into a constant cycle of borrowing to repay what you owe.
And while there’s no quick fix for getting your credit score up, you can take steps to help improve it over a period of time.
Disclaimer: We do not provide financial advice, this guide is for informational purposes only.
