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What is a credit score and how does it work?
Your credit score indicates to lenders how well you manage your finances.
A quick summary
What is a credit score?
There are 3 main credit reference agencies in the UK. Each collects information about you from public records, lenders and other service providers, which helps them to create a ‘credit score’.
This number indicates how likely you are to repay anything you borrow, based on your past history of using credit and managing finances. A higher credit score could mean you’re more likely to be accepted when you apply for credit, although it’s not a guarantee.
However, it’s useful to know that you don’t have one credit score. Each credit reference agency could hold different information about you, and has their own way of scoring. Your score also changes over time, just as your circumstances do.
Not only that, but lenders and other service providers complete their own scoring when you apply for credit, including information from your credit record. They also consider other factors like affordability and any past account history.
Build your understanding by watching a short video.
How does a credit score work?
Credit reference agencies collect information from a number of sources, all of which could influence the credit score they generate. These include:
The electoral register
Being on the electoral roll is one way that your identity and home address can be confirmed, which could help to improve your credit score.
Court records
Defaults, County Court Judgements (CCJs), Individual Voluntary Agreements (IVAs) and bankruptcy may negatively affect your credit score for up to 6 years.
How you spend
If you carry a lot of debt and are often close to your credit limits, it could suggest you’re reliant on credit. Keeping balances low could improve your credit score.
How accounts are managed
Lenders and service providers will report arrears, missed, late or defaulted payments, and if you go over any agreed credit limits.
How is a credit score graded?
Each credit reference agency uses a different scale, but generally speaking, the higher the number is, the better your chances are of being accepted when you apply for credit.
It’s useful to know this could be different to the information lenders and service providers see – they consider other factors, as well as information from your credit record – but it still gives you an impression of your financial position at any moment in time.
Below are examples from the credit reference agencies Lloyds Bank use:
Experian
|
Excellent |
Very good |
Good |
Poor |
Very poor |
|---|---|---|---|---|
|
Excellent 961 - 999 |
Very good 881 - 960 |
Good 721 - 880 |
Poor 561 - 720 |
Very poor 0 - 560 |
Equifax
|
Excellent |
Very good |
Good |
Poor |
Very poor |
|---|---|---|---|---|
|
Excellent 811 - 1000 |
Very good 671 - 810 |
Good 531 - 670 |
Poor 439 - 530 |
Very poor 0 - 438 |
TransUnion
|
Excellent |
Good |
Ok |
Needs some work |
Needs work |
|---|---|---|---|---|
|
Excellent 628 - 710 |
Good 604 - 627 |
Ok 566 - 603 |
Needs some work 551 - 565 |
Needs work 0 -550 |
How lenders calculate your credit score
Lenders are very experienced at assessing the eligibility of borrowers. In addition to your credit score, they also consider:
How to improve your credit score
Anything you do will take time, but you could improve your credit score by:
- Paying all bills on time – including credit repayments, utility and other household bills.
- Managing accounts well – stay below your credit limits and try to reduce debit balances whenever possible.
- Limiting applications – whether or not you’re accepted, ‘hard’ credit searches could affect your credit score, especially if you make a number of full applications in a short period of time.
- Registering to vote – it may boost your credit score if you’re on the electoral register.
Checking your credit score
It’s a good idea, especially if you’re planning an application, to check the details held by each credit reference agency. If any of their information is incorrect, you could submit a data dispute to the relevant agency, so they can investigate and update their records accordingly.
The agencies used by Lloyds Bank include TransUnion, Experian and Equifax.
Let’s look at the details
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A low credit score doesn’t necessarily mean you can’t get credit – each lender sets their own criteria for borrowers – but it could limit your options to credit products with higher interest rates and low credit limits.
Just bear in mind that multiple applications could damage your score, so it’s worth spending time to build your credit score. Some lenders issue credit builder products, which could help you to climb the credit score ladder.
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All credit reference agencies collect similar information, both from lenders and public records.
The information can vary between credit reference agencies though, so it’s a good idea to check each one, especially if you’re planning to apply for credit.
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If a credit reference agency holds information which isn’t correct, you could submit a data dispute to the relevant agency, so they can investigate and update their records accordingly.
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If you’ve never had credit, or have very limited experience, you might have a low credit score, meaning lenders will find it difficult to assess how well you’ll manage it.
If you’re eligible for anything, it’s likely your options will be limited to credit products with higher interest rates and low credit limits, so it’s worth taking steps to build your credit score before you apply. Bear in mind that multiple applications in a short period, could lower your score further.
From credit builder products, to managing bills and bank accounts carefully, there are things you can do which may improve your credit score over time.