You need a credit score to borrow money – but what exactly does that mean? We look at what credit scores are, what they're used for, what could affect yours, and why they're so important.
Your credit score is a number that represents your credit history. Credit reference agencies (CRAs) like Equifax, Experian and TransUnion calculate it. They look at a range of information to create your overall credit score, including your:
Your credit score may vary between credit reference agencies, as each uses its own criteria to calculate your rating.
Here's how the three CRAs in the UK work out credit scores.
Note: TransUnion uses different categories: Needs work, needs some work, OK, Good and Excellent.
Some companies will look at your credit score when you apply for credit or take out a product or service.
Your credit score gives them an idea of how reliable you might be at paying any money back.
A good credit score can also help you get a better interest rate, a cheaper monthly charge on a phone contract, or a lower car insurance premium.
A variety of factors can have a positive or negative effect on your credit score, including:
Consistently paying your bills on time builds your repayment history and can help you get a good credit score. On the other hand, regularly missing payments will have a negative effect and can significantly lower your credit score for years.
Going above 50% of your monthly credit allowance could be a red flag to lenders that you're in financial difficulties.
For example, if you have a credit card with a £1,000 limit and regularly use £500 or more, this can negatively impact your credit score.
You get a hard check added to your credit report each time you apply for certain credit products (learn about credit checks here).
Too many hard checks in a short period can harm your credit score. Experts recommend only applying for new credit products once every three months – the longer, the better.
If you're not using an account any more, this can be a red flag for lenders, so make sure you close it.
This isn't an exhaustive list; learn more about improving your credit score.
Buy-now-pay-later (BNPL) providers like Klarna and Afterpay allow you to buy and pay for products later, usually in instalments over a few months. These are generally interest-free.
Most BNPL providers don't carry out hard credit checks and generally don't inform credit reference agencies (CRA) – but some do.
As with other forms of credit, if your BNPL activity is sent to a CRA, it's added to your credit history and could impact your credit score, depending on whether you repay your BNPL product on time and in full.
Applying for a personal loan requires a hard credit check, which can impact your credit score if you apply for other credit products quickly.
However, once approved for a personal loan, making on-time payments will build up your credit history and can positively impact your credit score. Not making payments, known as defaulting, or making them late could damage your credit score.
You can easily find your credit score for free via the three leading CRAs: Experian, Equifax, and TransUnion.
Each agency weights different data, so your credit score may differ between them. You can check your credit report with each agency for a comprehensive idea of your credit.
Equifax, Experian and TransUnion all have different ranges for their credit scores because they all approach calculating the score slightly differently. Experian, the UK's biggest CRA, has its credit score range from 0 to 999, and a good score is anything from 881.
The higher the number, the better the credit score. It shows that you're reliable when taking out credit and that you're generally on time with making repayments.
If your credit score has decreased recently and you haven't missed any repayments on your credit products, it could be down to one of these external factors.
If you've moved house recently, you need to update your address on the electoral register (one of the public records CRAs use to calculate your credit score). Also, you've likely applied for a few credit products like a mortgage or internet which, as discussed above, can impact your score.
Having a joint bank account or mortgage with someone less financially reliable than you can impact your credit score.
Closing unused accounts is good financial admin and can positively impact your credit score. But it can also have a negative effect in the short term.
For example, closing a bank account you’ve had for a long time brings down your average account time, which lenders can view negatively.
Credit scores are typically updated once a month and, while there's no quick solution to improving your credit score, getting into good financial habits and being consistent can be a good approach.
Our How to Improve your Credit Score guide has some ideas for starting.