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Why your Credit Score is Important: What is it, How to Improve & More

1st February 2021

Understanding Your Credit Score and How to Improve

While we all try to manage our money smartly, personal finance can often prove an extremely tricky balancing act. There’s so much jargon within the industry that feels like it’s been purposefully used to confuse and muddle us.

One such area of confusion is credit scoring. Although used liberally across the industry, this term isn’t often given a thorough explanation or discussed at length. That’s why it’s easy to feel left in the dark, as far as your credit score is concerned.

Given the importance (and commonness) of the term, there should be more done to make people aware of what their credit score means, how it’s 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. And so, with that in mind, we’ve put together a jargon-free 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, alongside 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. Having a poor credit score can be extremely limiting, particularly 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; it opens up greater opportunities and makes being approved for credit agreements much easier. Some of the main benefits of credit building include:

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

  • The ability to raise your credit limit,

  • Lower interest rates.

A credit score isn’t technically the same as a credit rating, but they are used for similar purposes and are often used interchangeably. A ‘credit rating’ is also used to assess how credit-worthy something is, but is often graded as a letter (rather than a numeric score) and instead applies to a group, business or even a government, rather than an individual. For the purposes of this guide, however, 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’s something definitely worth being aware of so that you can work on building your score – particularly if it’s lower 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?

Generally speaking, 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 good credit scores 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 have 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’s important to remember, however, that this will take both 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.

Falling behind on repayments can negatively impact your credit score. The most common mistake is failing to make your repayment on an agreed date of the month.. Your lender may report your late or missed payment on your credit records which will have an impact on your credit score.

Depending on the number of payments missed your lender may register a default or a county court judgement (CCJ) 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 also 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’s 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 instance).

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.

Negative Information

These are pieces of information about your financial history that show you in a more negative light. Situations, such as 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 shouldn’t effect your credit score, as long as the main borrower manages to successfully make all the required repayments in full and on time. . However, if the borrower cannot afford their repayments and you have to cover it, your credit score could be impacted if you also have trouble keeping up with the repayments.

Hard and Soft Credit Checks

There are two different types of credit searches: soft and hard. 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 instance, 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. Improving credit scores takes time and is a long-term process, there are no quick fixes.

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.

If you don’t have a credit history yet, we’ve explained How to Build a Credit Score With No Credit History.

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. 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.

  4. Check for credit file mistakes. Double check all your personal details are correct and up-to-date.

  5. 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.

  6. 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.

  7. 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.

  8. Add your name to your 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.

How Does Your Credit Score Compare to the UK Average?

The following credit scores are the average for the three different CRAs:

  • Experian: 797 (according to data from October 2021)

  • Equifax: 380 (as per data from 2018)

  • TransUnion: No data currently available

Why is My Credit Score Different Across Different Websites?

Different websites (and the different CRAs) give different credit scores for several reasons. Firstly, the scoring scale they use is unique to them. If you switch from looking at Experian to looking at TransUnion, for instance, then you might at first be horrified by a score of 675. However, that’s actually an excellent score with TransUnion because their scale only goes up to 710.

Different websites and CRAs may also use different modelling systems to come up with your credit score; this means that, although the general factors they’re taking into consideration will be the same, there might be slight differences between the weighting that each variable is given in their calculations, for instance.

What is Bad Credit?

In broad strokes, bad credit can be considered as falling behind on payments, as well as an inability to showcase that you’ll be able to make repayments in the future. In a quantifiable sense, bad credit scores from the various CRAs can be seen in the preceding What is a Bad Credit Score section.

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