What is a Credit Score?
What is credit?
A credit score is a number which lenders use to determine how likely you are to pay back the money that you want to borrow. In other words, it enables lenders to calculate the risk of lending you money. Sometimes, it is also called a credit rating.
Before a loan provider will lend you money, they will almost certainly need to conduct a credit check, also known as a credit score check, on you.
Contrary to what many people think, you do not just have one credit score. Different loan providers will calculate your credit score in a different way.
What is a credit report?
Your credit report contains information about you and your financial history. It will include whether you already have a credit account.
It is one of the pieces of information that lenders use to decide whether or not to lend you money. Financial institutions also use other information, such as what is on your loan application, to calculate your credit score.
Everything from your address, to any credit you have had in the past, are included. A credit search (when lenders request your report) will also show if you have missed repayments.
You can check your credit report at a credit reference agency. There are three of these in the UK where lenders can submit a credit inquiry: Experian, Equifax and TransUnion.
Your credit report will also include a credit score. However, this is not as important as your credit file as a whole. This is because each loan provider will score you differently.
How Credit Scores Work
Credit reports are one of the elements lenders use to calculate credit ratings. Your credit score is largely based on your financial history.
Lenders use how you have behaved in the past to predict how you are likely to behave in the future.
This means that in practice, those with little or no credit history may struggle to get accepted for credit, as much as those with bad credit.
What are the credit score ranges?
If you check your credit report at all three credit reference agencies, you may notice that your credit score is different with each one. This is because they all calculate your credit score in a slightly different way.
Equifax scores from 0 to 700 (700 being the best). Experian scores up to 999 and TransUnion’s scores are up to a maximum of 850.
What factors affect your credit history?
Making repayments on time (or not) can have a big impact on your credit history. For example, if you took out a loan and did not pay it back on the specified payment date, this could negatively impact your credit score. Conversely, those who repay the money when required, may be more likely to have a higher score.
Additionally, if you make a large number of applications for credit in a short period of time, you could find that this affects your credit report. The same goes if you are rejected for credit.
How often you move house can also impact your rating. If you move around a lot, this could be affecting your credit score.
What’s more, it is not just information on your credit file which could impact your credit score. If you have history with the lender you are applying for a loan with, this could affect the credit rating that lender gives you. This can sometimes work in your favour if, for example, you have a limited credit history. On the other hand, if you have had issues with the lender previously, this could lower your score.
What is a credit check and how do they work
When you apply for financial products, the company will conduct a credit check on you. This is how they decide whether or not they are going to lend you the money. Credit checks are basically searches on your credit report.
Some lenders may perform an Experian credit check to see your credit report. Alternatively, they may use Equifax or TransUnion.
Every lender has a different way of scoring and a different set of criteria. So just because you are rejected by one lender, that does not necessarily mean that you will not be able to borrow money at all.
The difference between hard and soft credit searches
A hard search will leave a ‘footprint’ on your credit file. This means that if other lenders look at your report, they can see that you have previously applied for credit (and the outcome of your application). Most of the time, this will stay on your report for 12 months.
Hard credit searches will have an impact on your credit score.
Soft searches, on the other hand, do not affect your credit score. Lenders are not able to see these searches. However, you should be able to see them. Soft searches are just a type of preliminary check, rather than a full credit check. A lender may conduct this type of search if they want to show you your eligibility for a loan.
How lenders use credit ratings when they assess your application
Your credit rating will help a lender to decide whether they are willing to lend you money.
Just because you have a poor credit history, this does not necessarily mean that you will not be able to get credit.
If you have a bad credit score, a company could still decide to lend you money but at a higher interest rate.
Simple steps to improve your credit score
Make sure you are on the electoral roll - if you are not registered to vote it can be more difficult to get credit
Check your address is correct on your accounts - having an open account with the wrong address could cause problems
Consider using a credit card to build or re-build your credit history - make sure you pay it off in full every month to avoid any interest charges
If your credit score going down, it may be that you are financially linked to someone with a poor credit history, through a joint bank account or joint mortgage, for example.
Finally, check there are no errors on your credit reports.
How can you receive credit score for free?
The MoneySavingExpert.com Credit Club enables you to see your full Experian credit report with no charge.
Clearscore shows you your Equifax report.
Take a look at your TransUnion credit report for free on Noddle.