What is a credit score and how does it work?
Your credit score indicates to lenders how well you manage your finances.
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.
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Helping you to better understand credit scores.
When you apply for a credit card or loan, lenders will look at certain credit-related information about you to decide if they can lend to you responsibly.
One of them is called a credit score.
If you also have a good payment history on all your accounts, have low outstanding debts, and are able to afford your repayments, a good credit score means you’re more likely to be seen as a lower credit risk. And usually, the higher your credit score, the better.
A good credit score will mean you will have a greater chance of being offered credit, possibly at lower interest rates, meaning it will cost you less to borrow and you’re more likely to be offered higher credit limits.
Credit reference agencies are independent businesses that help lenders and other organisations to make informed, responsible decisions. They hold information about most adults in the UK including their identity, address and personal finance history.
These agencies will use information from public records, such as the electoral register, and court records.
They will also have information from other lenders, showing if you made repayments on time.
Some lenders offer tools to check your credit score for free, with no impact on your credit file. Ours is called ‘Your Credit Score’. It lets you see your credit information from TransUnion – one of the three main credit reference agencies in the UK. You can also see the factors that impact how your credit score is calculated.
Now, let’s look at some ways you can help improve your credit score:
Make sure you’re registered to vote on the electoral register.
- Be sure to pay your bills on time.
- Pay off your debts as soon as you can.
- Don’t regularly spend up to your credit card limit.
- And avoid applying for lots of loans or credit cards at the same time.
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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:
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 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 |
|---|---|---|---|---|
Excellent961 - 999 |
Very good881 - 960 |
Good721 - 880 |
Poor561 - 720 |
Very poor0 - 560 |
Equifax
|
Excellent |
Very good |
Good |
Poor |
Very poor |
|---|---|---|---|---|
Excellent811 - 1000 |
Very good671 - 810 |
Good531 - 670 |
Poor439 - 530 |
Very poor0 - 438 |
TransUnion
|
Excellent |
Good |
Ok |
Needs some work |
Needs work |
|---|---|---|---|---|
Excellent628 - 710 |
Good604 - 627 |
Ok586 - 603 |
Needs some work551 - 585 |
Needs work0 -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:
Frequently asked questions about credit scores
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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.