Most of us need to borrow money from time-to-time, whether it’s for monthly mobile phone contract, car insurance or buying a home.
When you borrow money, known as credit, you build up a credit score over time and this score can affect your ability to borrow money in the future.
Here, we’ll explain everything you need to know about your credit score and outline some things you can do to improve it…
What is a credit score?
Your credit score is a rating that helps lenders establish how credit-worthy you are.
The higher the number, the more likely you’ll be able to secure credit.
Your score is compiled from your history of past credit, the number of credit accounts you have open, your level of debt, your repayment history and a host of other criteria.
Essentially, lenders want to know that you’ll repay credit when you’re supposed to, and they use your credit score as a guide to help them.
Your credit score will help a lender decide:
- Whether they lend to you at all
- How much they lend
- How much interest you’ll be charged
How to check your credit score
You can check your credit score at any time – and it’s a good idea to do this regularly so you can be sure everything looks correct before you apply for credit.
Equifax, Experian and TransUnion are the UK’s three main credit reference agencies and they all offer free access to your credit score and credit file online through their partner agencies:
When you access your credit file, you’ll see:
- Your credit score based on the data held by your chosen credit reference agency
- A list of your credit accounts, including bank and credit cards, loans or utility company debts like gas, electricity and mobile phone payments
- The information of anyone who has joint credit with you
- Information on County Court Judgments, repossessions or bankruptcies, if any of these are relevant to you
- Whether or not you’re on the electoral roll
What is a good credit score?
Lenders will have their own individual criteria for assessing your credit score.
But by accessing your credit file through one those three credit reference agencies, you’ll be able to see how your credit score looks to the naked eye.
Each of the three credit agencies score slightly differently, as below:
|
Experian |
Equifax |
TransUnion |
|
|
Very poor |
0-560 |
0-279 |
0-560 |
|
Poor |
561-720 |
280-379 |
561-565 |
|
Fair |
721-880 |
380-419 |
566-603 |
|
Good |
881-960 |
420-465 |
604-627 |
|
Excellent |
961-999 |
466-700 |
628-710 |
What credit score do you need for a mortgage?
Your credit score won’t be the only factor that determines your suitability for a mortgage and each lender will work out their own score for you based on your history.
By working out their own credit score, lenders will be able to decide if lending to you is a risk or not.
The higher your score, the less of a risk you’re likely to be and the greater the chance you’ll be accepted for a mortgage.
Does having an overdraft affect your credit score?
Having an overdraft can affect your credit score, because an overdraft is seen as a debt.
If you have an approved overdraft limit with your bank, this will appear on your credit file as a debt and if you don’t use it, the balance will show as zero.
While an agreed overdraft is less likely to affect your credit score, if you go over that amount, it could harm your credit rating.
If you use your overdraft but pay it off regularly, this could actually improve your credit score as it will show that you can borrow money and pay it back, so you’d be classed as a reliable borrower.
How to improve your credit score
Even if you have a good credit score, there’s never any guarantee that you’ll be accepted for credit.
So, you should always look for ways to improve your credit rating, even if yours is already good.
Here are five things you can do to boost your credit score, which could help when buying a house or renting a property.
1 Register for the electoral roll
If you’re not registered to vote, this can affect your credit score. Being on the electoral roll means lenders can easily check you are who you say you are, meaning they can confirm your identity and protect themselves from fraud.
Put simply, the more security a lender has, the more likely they’ll be to lend you money.
2 Check your credit file
Legally, you are entitled to check your credit file as often as you like – and it really is worth doing this. Small errors on your credit file can have a big impact on your credit score, with even an incorrect address affecting it.
Check all your details before applying for credit and correct anything that needs to be corrected.
3 Pay off the credit you already have
Lenders want to see that you are a trusted, reliable borrower.
So, if you have a mobile phone contract or a broadband account, for example, pay your bills in full and on time over a long period of time to build up a solid credit history.
4 Are you linked to someone else?
If you have joint credit with someone else, for instance a spouse, this could affect your own personal credit score if theirs is poor.
By working with them to improve their own score, you could, in turn, improve your own.
5 Clear your debts
While having debt and paying it off can usually help your credit score, if you have a lot of debt and you’re paying it off slowly, this can ring alarm bells for lenders who might think you’re in financial trouble.
Try to pay off what you have before applying for new credit, as this will show lenders that you’re a sensible borrower.
