What is a credit score and how does it work?

What is a credit score?

Your credit score is basically a number representing how good you are at paying your bills – whether that’s for utilities or forms of credit – on time. The more reliable you are at paying what you owe, when you owe it, and using credit that’s available to you responsibly, the better your credit score.

How does a credit score work?

Your credit score is calculated based on your credit history. This is a record of your financial history including borrowing, applications for credit, payments and addresses spanning back several years.

When you apply to borrow money, for example through taking out a credit card or loan, lenders will want to know if they can trust you to pay them back.

To find this out, they’ll check your credit score and then decide whether to approve your application for credit, how much to lend you and what interest rate to offer.

Having a good or excellent credit score shows you’re good at paying your bills on time. It generally means:

• You’re more likely to be offered credit (e.g. a loan, credit card or mortgage) when you apply

• You’ll be offered a higher amount than if you had a poor credit score

• You’ll be offered a better interest rate than if you had a poor credit score

How do Equifax, Experian and TransUnion's credit scores work?

There are three main credit reference agencies (CRAs) in the UK. They all have their own scoring systems, as follows:

Equifax

Experian

TransUnion

It’s worth checking your credit score with all three agencies, as they each calculate things slightly differently. There may occasionally be an error on one CRA’s report but not others, and you can apply to have this amended.

Find out how to check your credit score for free.

How is a credit score calculated?

Credit scores are complex and a wide range of factors are used to calculate them, including:

• Whether you’ve used credit before

If you haven’t had any credit-based products before, you may not have a credit history, so you’ll need to build this up in order to achieve a good score. Credit-builder credit cards can be useful for this.

• Your repayment history

Lenders will look for evidence of you keeping up with repayments if, for example, you’ve got a credit card or mortgage.

• If you’re on the electoral roll

Being on the electoral roll is a way for lenders to check that you live at the address you say you do, so it saves time on credit applications which helps lenders.

• If you’ve had any bankruptcies, County Court Judgements (CCJs) or Individual Voluntary Arrangements (IVAs)

Major financial events such as these will leave a mark on your credit score and may cause lenders concern over whether you'll be able to make your repayments in full and on time.

• Joint finances

People you’re financially linked to, for example through a joint mortgage, will show on your credit report. If they have a bad credit score, it could affect yours too.

• Your credit utilisation rate

Your credit utilisation rate is how much of your available credit you’re using. Being close to your credit limits could suggest you rely too much on credit and lower your score.

• Missing Buy Now Pay Later payments

Paying for things using Buy Now Later companies such as Klarna or Clearpay won’t affect your credit score, according to Lloyds, but missing payments to them could.

• Overdrafts

While dipping into your overdraft isn't always a great idea, using an arranged one and paying it off regularly can boost your score. Managing it poorly can have the opposite effect.

If you don’t already have an arranged overdraft and try to spend more money than you have in your bank account, your bank may allow you to use an unarranged overdraft. However, this could have a negative effect on your credit score and potentially cost more in interest.

• Gambling transactions funded by credit

You won’t get a bad credit score from gambling alone. However, if you’ve missed payments because of gambling problems, or if you’ve used a credit card to pay for gambling, it could be a red flag to credit agencies.

Is a high credit score better than a low one?

Yes – the higher your credit score, the better. A high credit score suggests you can be trusted to pay back money on time and that you’re a low risk to lenders.

What information do credit agencies have about me?

Credit reference agencies usually have the following information about you:

• Basic personal details such as your name and recent address history

• The banks, credit card suppliers and utilities providers you use

• Your regular payment history

• How much credit you have available to you, and how much of it you’re using

• Anyone you’re financially connected to, for example anyone you have a joint mortgage with

• Whether you’ve had any major negative credit events such as a bankruptcy

You can see what types of data credit reference agencies have about you by checking your credit report for free.

What if there’s incorrect information in my credit file?

If you’re worried that information on your credit report is wrong or out of date you can dispute it. Each of the main credit reference agencies has its own way of handling this:

Equifax – use its online form and select the error you want to report

Experian – get in contact via the online form and select the relevant query from the list. There’s also the option to explain what you think is wrong.

TransUnion – use its consumer enquiry form. Select ‘Dispute’ and write down your query.