What is a Credit Score and How Does it Work?

And why is it becoming ever more important in our lives?

Zoe Burt
March 15, 2024
(Photo: Clay Banks/Unsplash
Personal Financne
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Let’s face it, credit is a word that can get a bad rep. It hangs around with the wrong crowd (think credit cards) and the talk of the town is that they’re bad. There can be a tendency to think of spiralling debt, overspending and mismanaged finances when we utter the c word. But a credit rating can be good, and is actually pretty necessary in the world we live in today. Time to break down what it is, how you can get a good one and why you really should. 

Who has a credit rating?

In the UK, a credit rating is a score that helps lenders to decide how trustworthy you are when borrowing money. Whether we know it or not, if you're a resident in the UK, you will have a credit rating out there which will be based upon a whole host of stuff you’ve been up to in the past. When you go to apply for a loan, whether it’s to buy a sofa or to take out a mortgage, the lender will then use the credit rating to assess firstly whether they want to lend you any money and secondly at what rate of interest they’re willing to take on you.  

Who creates the credit rating?

In the UK, a credit score is generated by credit agencies, such as Experian, Equifax or TransUnion. They all hold information on a whole host of personal details and financial history such as your bank account providers, any loans taken, joint accounts held, any direct debits set up, overdrafts, all addresses you’ve lived in and even if you’re on the electoral register. This information is then collated and analysed to generate a credit score, which will be somewhere between 0 and 1000, with 1000 being the best and 0 being the worst. The credit rating is the overall term to describe the concept. A credit score is what each individual agency can generate on you, which may vary slightly depending on the information they have and how they’ve analysed it. All sounds a bit black mirror, right? 

If you have no borrowing history, you won’t start at the bottom, you just won’t have a score until you apply for credit and prove your financial credibility (Image: Female Invest)

What is a good credit score?

There are three main credit ratings agencies. Each uses slightly different criteria to determine the credit score that they give you. As a collective, this is known as your credit rating. You can request a free overview of your credit score, which may change with time.  Depending on which service you use to request a credit score overview will depend on the score you’re given. Check out the below agencies and the tally system that they use. 

​​- Experian: 0-999

- Equifax: 0-1,000

- TransUnion: 0-710

Don’t be put off by the zero, it’s actually almost impossible to obtain a score of zero. If you have no borrowing history, you won’t start at the bottom, you just won’t have a score until you apply for credit and prove your financial credibility. Most people’s scores will change at some point, this is totally normal and to be expected. Don’t panic if it’s fluctuating, it may be that a change in address or circumstances or even just technological processing causes the score to be altered slightly. 

What causes a bad credit score?

If you think you can dodge a bad credit score by simply never borrowing, we’ve got some bad news for you. It’s all about assessing your reliability as a borrower, and that can be influenced by a number of factors. If you’ve never appeared on any of the tests or lists, you’ll be lacking in proof of dependability. Equally, if any of these factors are amiss your score will be lower. Credit agencies will assess the following factors to determine your score: 

Credit scores are all about assessing your reliability as a borrower

  • Repayment history: They will check any past loans you had, if you missed any payments and, in the most serious of cases, if you were subject to any County Court Judgements (CCJ’s) as a result of missing payments. 
  • Current loans and borrowing: Agencies will assess if you’ve got any current loans and how much is outstanding on money that you’ve borrowed. If you’re currently in a lot of debt, you may suffer with a bad credit score as it could show that you’re tending to borrow a lot and are living outside of your means. 
  • Residential history: Your address and your presence on an electoral roll will also affect your credit score. If you’ve moved frequently, have mismatched addresses on different registers or have been declared bankrupt at an address in the last 7 years, your credit score will be negatively affected. 
  • Fraud: If there has been a past history of fraud or identity theft on your bank accounts or credit cards, this can negatively impact your credit score. You can rectify these issues relatively easily, but if you see a fluctuation in your score, it could be that unusual activity has led to a drop. 

Why do I need a good credit score?

It's not all bad, credit scores can be a great thing. First and foremost, a credit score will be generated and checked when you want to take out a loan, such as a mortgage or to get a phone contract. If you have a solid credit score, you’re more likely to be offered the loan or mortgage and might even get offered better rates as you’ve proved yourself to be a responsible individual with money managing skills. 

If you don’t have such a great credit score, this could cause you some hassle if you do ever want to buy a house or take out a loan, even if it’s to buy something as simple as a sofa or fridge. This could hamper your ability to invest in your future by buying a house, as well as making it trickier to buy larger purchases like a car. 

How can I improve my credit score?

You might now be wondering, how on earth can I improve this situation, and will anyone ever lend me any money ever?! Don’t panic, there are some simple ways to start improving your credit score. The key is essentially demonstrating that you’re a trustworthy, organised individual who can manage their own finances and therefore crucially a loan.

Manage monthly payments

One of the key reasons why your credit score might be low is because you’ve got a history of missing payments. Setting up some direct debits to pay bills shows you can manage monthly payments will be a key way of conquering this. Paying regular bills on time will show that you’re able to handle money. 

Your credit score is all about assessing how reliable you are (Photo: Engin Akyurt/Unsplash)

Get yourself on the electoral register

Your credit score is all about assessing how reliable you are and how safe it is for a large institution to lend you money. Getting yourself on the electoral register shows that you’re organised and grounded to rent in one place. It also means you’ve provided your name, date of birth and address in a recognised central directory, which gets you brownie points and makes it easier for lenders to check who you are. 

Cut out negative financial influences

Whilst credit agencies can’t see who you live with or who you’re in a relationship with, they can see if you’ve had a financial history with anyone. If that certain someone has a poor credit score, due to debts or other issues, this will also drag your credit score down. By cancelling any joint accounts with ex’s who might negatively be affecting you is an easy way to improve your credit score. 

Tackle debt, and quickly

If you’ve got debts that are totting up, it's likely that it will be adversely affecting your credit score. If you’ve got multiple debts that you’re struggling to keep on top of, it might be worth investigating debt consolidation programmes. If you’re simply burying your head in the sand, now is the time to emerge and start handling some of that debt. 

Consider a credit card

And bringing us back to the old credit card. By using a credit card responsibly, you can quickly build up a solid credit score. Make sure that you pay the maximum amount each month and don’t be tempted to postpone payments. Try and use a credit card as if it were a simple debit card- live within your means to  prove that you can successfully handle a budget and repayments and work up your credit score. 

The bottom line

Credit ratings come with a lot of jargon, mystery and ultimately worry. It doesn’t have to be so tricky, it’s just about following the basics of financial management, and proving to the agencies that you're a responsible borrower, to have and maintain a respectable credit score. If you’re considering taking out a mortgage in the near future, having a solid credit score is a must. Run a quick check and see where your figure is at via one of the online services. If it’s lower than you want, book an appointment with yourself and your finances and get that score back on track.

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