Your credit score is used by lenders like banks and mortgage brokers to determine if you qualify for credit. Whether you’re looking to take on a loan, or get a mortgage on your first home, your credit score will play an important role in their decision.
In this guide we’ll explore your credit score in more detail, including what a credit score is, how the scoring system works, what factors impact your credit score, and what impact debt can have on your credit history.
How do I find out my credit score?
You can request a free copy of your credit report from any of the three major credit reference agencies - Experian, Equifax, and TransUnion.A credit score is a tool lenders use to decide how ‘creditworthy’ you are. In other words, whether they can trust that if they lend you money, you will be able to pay it back.
Your credit score is a three digit number. Theoretically, the score goes up to 999, but in practice your credit score will usually range between 300 and 850, while the average credit score in the UK is somewhere between 500 and 600.
Any time you want to borrow money, lenders will look at your credit score and use it as a gauge of whether you can be trusted to repay what you borrow. The higher your score is, the more likely you are to be successful in a credit application.
Your credit score is assigned to you by credit reference agencies, independent organisations who monitor your financial history.
They will use information like the length of your previous credit agreements, your credit mix, and your history of making repayments, to decide how high your score should be.
If you have a poor credit score, you might struggle to do things like take out a loan or be accepted for a mortgage. If you have a good credit score, on the other hand, these things will be much easier for you.
The three main credit reference agencies, Equifax, Experian, and TransUnion, all offer free credit score checks for anyone who is interested in finding out what their credit rating is.
You may have seen the term ‘credit’ being attached to various different phrases. Two of the most important are ‘credit score’ and ‘credit history’. While each has an impact on the other, your credit score and your credit history are two different things.
As previously mentioned, your credit score – also known as your credit rating – is the three digit number given to you based on your financial history. If your credit score is high enough, lenders are more likely to allow you to borrow money from them.
Your credit report, often referred to as your credit file, is a document that details your financial history. Information like your existing credit agreements, successful repayments, and defaulted payments are all listed on your credit history, usually for a period of six years from when they occurred.
Your credit report and the information it contains will be used by credit reference agencies to determine what your credit score should be at a given time.
a diverse credit mix is key to a good credit score
Certain kinds of financial behaviour are seen as a red flag by lenders, and will negatively impact your credit score. Below, we outline some of the most important factors that will determine how high, or low, your credit score will be.
Starting with the most obvious factor, your credit history has a huge impact on your credit score.
This includes the age of your current credit accounts, whether it’s a mobile phone contract or a personal loan, as well as your history of making payments on time. As a general rule, the longer your credit history, the higher your credit score will be.
How much of your available credit you’re actually using also plays an important role in deciding your credit score. This figure is known as your credit utilisation ratio.
Simply put, companies will look at what percentage of your credit card limit (or the maximum amount you can borrow) you are using. If your credit utilisation is low, lenders can see you’re not overly reliant on credit, and will be more likely to lend to you in future.
You can think of credit mix as credit diversity. It refers to the different kinds of credit accounts you currently carry.
Lenders like you to have a diverse credit mix – including mortgages, loans, and credit cards. A diverse credit mix shows lenders you have managed different kinds of credit responsibly over time, and this will be reflected in a higher credit score.
New credit agreements have an impact on your credit score, and there’s a simple reason for this: If you’ve made a lot of recent applications for new credit, you’re seen as a greater credit risk.
That’s not to say you shouldn’t apply for new credit – a diverse credit mix is key to a good credit score. It just means you shouldn’t open up too many new credit applications at once.
It was literally the best decision of my life, and it has actually changed my life, cheesy as that sounds, it has changed my life.
Paige , IVA Customer
You can check your credit score or get a full credit report online from any of the main credit reference agencies:
All you have to do to get your Experian credit score, for example, is input your personal information and answer some questions about your financial situation, and they’ll provide you with a basic credit report in a matter of minutes.
It depends what kind of debt. Technically, any form of credit is a kind of debt – you’re borrowing money upfront and repaying it over time. In general, this is good for your credit score.
It’s only when you fail to make repayments that debt becomes a problem. Any defaulted payment or unpaid debt will have a negative impact on credit reports, as lenders will view that kind of behaviour as a red flag.
Defaulted payments will also be picked up on by any major credit reference agency and included in your credit report – usually for a period of six years. This will lower your credit score and make it more challenging for you to access new credit.
Below are some simple tips that will help you improve your credit score.
Timely payments are the be-all-and-end-all when it comes to improving your credit. If you can build up a positive payment history that shows you consistently pay your monthly bills on time, your credit score will reflect that.
Even credit agencies sometimes make mistakes, including on your credit report. Something as trivial as a typo on your report can negatively impact your credit score, so it’s important to go through your credit report with a fine toothcomb and ensure there are no errors.
One of the easiest ways to boost your credit score is to prove that you have a fixed abode – lenders tend to trust people more when they know they have a stable roof over their heads. That’s why you should visit your local council website and join your local electoral roll.
We all want a better credit score, whether that’s to get a mortgage on a new home, or to take out the loan you need for the wedding you’ve always dreamed of. But missed payments and mounting debt can really damage your credit.
If you’re looking for more information on how debt impacts your credit profile, we can help. At Your Debt Expert, we work every day to help clients rebuild their credit profile after debt problems. We can help you too.
For financial advice from a company you can trust, talk to one of our friendly advisers today on 0800 082 8086.
Advice and support is also available at Money Helper.
*A debt write off amount of between 25% and 75% is realistic, however, the debt write off amount for each customer differs depending on their individual financial circumstances and is subject to the approval of their creditors. The example provided has been achieved by 10% of our IVA customers in the last 12 months.
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