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What is a credit score? What factors go into creating this seemingly mystical number and how does it represent you? Why is your credit score impacting your ability to get a credit card or personal loan?

While credit scores can seem confusing, we actually know a lot about how they’re created and even what you can do to improve them. If you’d like to make sure your score is nice and healthy or want to understand why it’s looking a little low, read on.

This guide to understanding credit scores will help you comprehend just how credit reference agencies and lenders create these numbers and what they mean for you.

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Types of credit scores

First things first. There is no all-seeing credit worthiness judging being, so there is no such thing as a single universal credit score either. This means that when you apply to borrow with different lenders they might assess how much of a risk you are, based on a credit score provided by one particular reference agency or several agencies. They could also factor in information about their own previous dealings with you too.

In fact, they may even take into account how much they’d like you to be a future customer for another product they sell.That’s a lot of variables! The result? A custom credit score that’s unique to that lender when you apply for a particular product. And that’s why the wonders of credit scores can sometimes be hard to get your head around.

Banks and other lenders have several means of credit scoring at their disposal. They will usually start with information from one or more of the three UK credit reference agencies:

  • Experian
  • Equifax
  • Transunion (formerly CallCredit)

These agencies use information about you and your credit history and turn it into a nice neat number in order to fairly predict if you’re likely to be a good borrower.

Although the number ranges used by different agencies and lenders vary, higher scores are always reserved for those with better credit profiles, who are deemed to be low risk borrowers.

Credit score criteria

To calculate your credit score, reference agencies will try to get as full a picture of your borrowing history and current financial situation as possible. The formula that works out your score includes info such as whether you’ve defaulted on any borrowing, missed payments, made late payments or exceeded credit limits. This can come from anywhere that you’ve had a line of credit in the past, including utility suppliers banks, credit card providers, store cards, mobile phone providers, loans, mortgages and car finance.

Payday loan lending is flagged up too and this can be a real warning sign to lenders that money management is not one of your best skills. Some credit card providers go as far as sharing information with agencies about whether you pay just the minimum amount off your credit card each month or clear it in full.

Public records are also used with information such as if you’re registered to vote at the correct address and if you have any court orders or CCJs against you. Such information helps to form a fuller picture of your finances. In calculating your score, the reference agency considers how many existing lines of credit you have open, and how many it believes you can afford to comfortably service. They’ll also look at whether you’ve had recent hard credit searches to try and factor in whether your finances may currently be under strain.

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How to improve your credit score

Your credit score impacts your access to different financial products and also your ability to get the most desirable rates advertised on things like loans and credit cards. So, if your score isn’t looking too healthy, it’s time to take action.

Start by checking your credit file for any errors – you can pay £2 to view your credit report with each of the main reference agencies (Experian, Equifax and Transunion). You can also sign up for free trials or check out your score using a free service like Noddle or Clearscore.

Check your credit file and know where you stand

It is possible for agencies to hold slightly different information about you, so it’s wise to check all three regularly, especially before you make any big applications for things like mortgages. Checking your file may highlight that you’ve failed to close certain credit card accounts, or changed addresses on an old bank account. All of which could hold back your score. You could also find evidence of fraudulent activity that needs to be investigated and then corrected.

On a cautionary note, be wary of linking yourself to others financially by adding them to credit cards or having joint bank accounts. Their bad behaviours could reflect negatively on you. You can ask for individuals associated with your credit report to be removed if you are no longer linked to them financially, and ask to be financially disassociated.

Once you know your files and scores are an accurate reflection of your financial wellbeing, you can get started on boosting them.

How to improve your credit score: a summary

  • If you’re not already registered, ensure you’re on the electoral roll.
  • If making late payments due to forgetfulness has been your downfall in the past, set up direct debits where possible and investigate whether your lender offers money management features such as reminder texts.
  • Payday loans or taking cash out on credit cards are real no-nos that can send your score diving – take time to educate yourself on good credit habits.
  • If you’ve managed credit badly in the past, you could look at improving your rating with use of a credit card for bad credit. Or if you have an existing credit card, commit to using it sensibly by only spending a small amount each month and fully clearing the balance.
  • Repairing a damaged credit file can take time, so patience is required – review your credit file regularly and you should see your score gradually rise.

If you do want to apply for borrowing like loans or credit cards, take a careful and considered approach using all of the tools at your disposal to make best use of whatever your credit score may be.

Our moneymatcher uses a soft search to find products you are likely to be accepted for before making an application. This way you protect your credit score by limiting the number of hard searches on your file.

Looking at improving your credit score for a credit card application? Take steps to improve your credit score today.