The credit score influences many aspects of your financial life in the UK. It affects your ability to get approved for credit cards, loans, and mortgages, and can even determine the interest rates you're offered. In this guide, we'll explain how credit scores work in the UK and how you can maintain a good score.
Credit Scores Explained
A credit score is a numerical expression of your creditworthiness based on your credit history. It typically ranges from 0 to 1,000, with higher scores indicating that you are more likely to repay your debts on time.
Credit scores are produced by credit reference agencies, which are independent organisations that collect and manage credit data from various sources, including lenders, banks, and utility companies.
Who Compiles Credit Scores in the UK?
In the UK, there are three major credit reference agencies: Experian, Equifax, and TransUnion. They gather information on individuals' credit repayment history, current credit balances, and searches made against your credit file.
Each agency has its own methodology for calculating credit scores, but generally, they consider factors such as payment history, current debts and credit utilisation, length of credit history, new credit applications, and credit diversity.
As each agency uses its own calculation method for generating credit scores, therefore, this means that your credit score can vary depending on the agency providing it.
However, the factors that affect your credit score remain the same across all three agencies. Thus, if you have a strong credit history and have made consistent repayments, then your score is likely to be high across all three agencies.
Credit reference agencies are organisations that collect and manage credit data from various sources, such as lenders, banks, and other financial institutions. They use this information to create credit reports, containing details about your credit history and financial behavior. The three main credit reference agencies in the UK are Experian, Equifax, and TransUnion, and all of them use different methods to calculate credit scores.
Note that the data used to evaluate your credit history only goes back six to seven years, but crucial details like bankruptcy or county court judgements would stay longer.
How Does Credit Scoring Work?
Credit scoring works by analysing your credit history, financial behaviour, and creditworthiness to predict how likely you are able to repay a loan or credit card. Lenders use this information to assess your level of risk and decide whether or not to approve your application for credit.
Your credit score is not binary and can range from 0 to 1,000. A score of 0 indicates that you have no credit history, while 1000 indicates that you have a perfect credit history. However, most people fall within the range of 300 to 850.
Lenders use a variety of data points to evaluate your creditworthiness, such as your history of on-time payments, the amount of debt you currently owe, the length of your credit history, and the number of recent credit inquiries.
They also consider your income and employment status, as well as your age and residential status. All of these factors are used to create a complex algorithm that assigns you a credit score.
How Are Credit Scores Calculated?
Credit scores are calculated using a variety of factors, including your history of on-time payments, current debts and credit utilisation, length of credit history, new credit applications, and credit diversity.
Each credit reference agency uses its own unique algorithm to calculate scores, which means your score may vary depending on the agency selected. However, there are certain factors that affect your credit score regardless of the credit reference agency.
Here are 7 of them:
Missed payments
Receiving a County Court Judgement (CCJ)
Loan defaults
Credit limits
Credit card repayments
Number of credit accounts
Length of credit history
While credit scores take many factors into account, there are some things that don't show up on them. These include;
Parking fines
Council tax
Medical information
Criminal records
Public records (except bankruptcy)
Your income
However, they may still have an impact on your finances which should not be ignored. It's always best to pay bills and debts on time to avoid late payment charges and potential damage to your credit score.
Credit Score Brackets: The Good, the Bad, the Ugly
Now that we understood what a credit score is and how it's calculated, let's take a look at the different credit score brackets in the UK. As previously mentioned, credit reference agencies use different algorithms to calculate credit scores, which means that the score required to be deemed 'good' or 'fair' can differ between them.
Here's all you need to know about each credit reference agency;
1. TransUnion Credit Score: The TransUnion Credit Score ranges from 0 to 710, with 710 being the highest score you can achieve. A score of 0-550 is considered very poor, and 628-710 is excellent.
2. Equifax Credit Score: The Equifax Credit Score ranges from 0 - 1,000. A score of 0-438 is considered poor, while 811-1000 is considered excellent.
3. Experian Credit Score: The Experian Credit Score ranges from 0 to 999, with a score of 961-999 being considered excellent, and 0-560 being considered very poor.
Your credit score bracket can have a significant impact on your ability to obtain credit.
According to Experian;
If you fall under the "very poor" bracket, you are more likely to be denied credit cards, loans, and mortgages.
If you are categorized as "poor", you may still be able to obtain credit but at higher interest rates.
Falling under the "fair" bracket might mean you may receive acceptable interest rates, but your credit limit might be limited.
If your credit score falls under the "good" bracket, you are eligible for most credit cards, loans, and mortgages but may not qualify for the best deals.
Being classified as "excellent", you stand a higher chance of accessing the best credit cards, loan facilities, and mortgages.
Your credit score has a significant impact on your ability to obtain a mortgage, as well as the interest rate you'll receive on it. Mortgage lenders use your credit score to assess the risk of lending you money.
A higher credit score indicates that you're more likely to make your payments on time and pay back what you borrow. This lowers the lender's risk, which means you might be able to get approved for a mortgage with a lower interest rate.
What Is a Good Credit Score?
While credit scores can vary depending on the credit reference agency used, a score above 881 on Experian's scale, 531 on Equifax's scale, and 604 on TransUnion's scale are generally considered good enough for you to access acceptable credit.
Here's a summary of each of the credit scores with each credit reference agency:
Equifax credit score rating (0-1000) | TransUnion credit score rating (0-710) | Experian credit score rating (0-999) | |
|---|---|---|---|
Very poor | - | 0-550 | 0-560 |
Poor | 0-438 | 561-565 | 561-720 |
Fair | 439-530 | 566-603 | 721-880 |
Good | 531-670 | 604-627 | 881-960 |
Very good | 671-810 | - | - |
Excellent | 811-1000 | 628-710 | 961-999 |
According to Experian, a 'very poor' or 'poor' credit score can make it difficult to get a mortgage and most of the plans available would have high-interest rates. With a 'fair' credit score, you can get mortgage deals at reasonable interest rates but a 'good', or 'excellent' score can end up with better deals.
How to Check Your Credit Score?
If you're looking to check your credit score in the UK, there are 3 main ways;
1. Through a Credit Reference Agency
These include Experian, Equifax, and TransUnion. Each company provides a slightly different service, but all of them typically offer you a credit report and credit score, as well as information on how to improve your score.
Based on your score, they also provide eligibility calculators that allow you to see which credit products you're likely to be approved for. Experian offers a free account for users to access their credit score, with updates provided once every 30 days.
2. Credit Scoring Services
You can also check other companies like;
ClearScore which provides a credit report and score using data from Equifax, free of charge. The platform updates its reporting every week and offers advice on how to improve your score.
Credit Karma (previously known as Noddle) provides a free credit report using data from TransUnion.
CheckMyFile which offers a free 30-day trial to check your score. The unique feature of this tool is that it offers a side-by-side comparison of your score across all three Credit Reference Agencies: Equifax, Experian, and TransUnion.
3. Through Your Financial Institution, Credit Card, or Loan Statement
If you have a credit card, loan, or bank account, you can usually check your credit score through your financial institution's online portal or mobile app.
Note: Not all financial institutions provide this service, so it's worth checking with yours to see if it's available or not.
Additionally, the information provided by your financial institution may come from only one of the three Credit Reference Agencies, thus, it's essential to check your credit score from all three (Equifax, Experian, and TransUnion) to get a complete picture of your creditworthiness.
What’s Good for Your Credit Score?
Now that we've covered the basics of credit scores in the UK, let's discuss a few actions that can help boost your credit score or maintain a good score:
1. Registering to Vote: Registering to vote shows that you have a stable address and that you are more likely to receive important financial information. It also helps credit reference agencies to verify your identity more easily.
2. Setting up Direct Debits to pay bills: Setting up Direct Debits to pay bills and rent will ensure that you don't miss any payments and pay on time each month. This will show lenders that you're a responsible borrower and can be trusted to make timely repayments.
3. Using credit cards responsibly: This is crucial in building your credit score. Here, it means paying off the full balance each month, keeping a low balance-to-limit ratio, and avoiding cash advances and high-interest loans. Using credit cards responsibly demonstrates financial discipline and management.
4. Maintaining a long credit history: Your credit score is influenced by the length of your credit history - the longer it is, the better it would be. Long credit history demonstrates that you have a track record of paying your bills on time and managing your finances responsibly.
What’s Bad for Your Credit Score?
While there are some behaviours that can improve your credit score, there are also others that can lower it. Here are five things that can negatively impact your credit score:
1. Missing payments: One of the biggest factors that can damage your credit score is missed payments. When you fail to make a payment on time, it is reported to the credit reference agency which further put a significant impact on your credit score.
It is therefore important that you always try your best to make payments on time, and if you are unable to make a payment, contact your lender to discuss repayment options.
2. Applying for credit too often: Applying for too many credit accounts in a short period of time can hurt your credit score as it shows that you may be overextending yourself financially. It also suggests that you are desperate for credit, which may indicate financial instability.
3. Being close to your credit limit: Being close to your credit limit can harm your credit score as it indicates that you are relying heavily on credit. This can cause lenders to view you as a high-risk borrower, which can result in higher interest rates or rejection for future credit applications.
4. Constantly opening new credit accounts: Constantly opening new credit accounts can also harm your credit score since it is a sign of being desperate for credit or struggling to manage your finances. Your credit applications may be denied in the future or subject to higher interest rates as a result of lenders seeing you as a higher-risk borrower.
How Can You Improve Your Credit Score?
1. Get a credit builder card: A credit builder card can be an excellent choice for you if you're having trouble getting credit approval. These cards allow you to borrow a small amount and repay it over time, making them ideal for people with little or no credit history. This helps to build up your credit history and demonstrates to lenders that you can be a responsible borrower.
2. Pay down your debts: If you have outstanding debts, paying them off can help to improve your credit score. This demonstrates to lenders that you are responsible with your finances and can effectively manage your debt.
3. Keep your credit utilisation low: Your credit utilisation refers to the amount of credit you are using in relation to your total credit limit. Maintaining a low credit utilisation can help improve your credit score as it shows lenders that you are not relying heavily on credit.
4. Review your credit report regularly: It's important to review your credit report regularly to ensure that there are no errors or inaccuracies that may negatively impact your credit score. You can review for free through the three major credit reference agencies in the UK as listed above.
5. Close unused credit accounts: If you have credit accounts that you no longer use, it may be a good idea to close them. This can help to improve your credit score by reducing the amount of credit available to you, which can make you appear less risky to lenders.
The Bottom Line
Understanding your credit score is an essential part of managing your finances, especially if you plan on applying for credit in the future. Your credit score represents your credit history and financial behavior. To maintain a good credit score, it's important to make payments on time, keep your credit utilization low, and avoid overextending yourself financially.
