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Credit score explained: Understand your credit rating

Credit scores are perhaps a bit of a mystery to many of us. Some of us can mistakenly think credit ratings only matter if you are applying for things like credit cards, loans and mortgages. However, these days even landlords and letting agents will do a credit check before renting a house to you. A poor credit score can also affect your ability to get something as simple as a mobile phone contract. Let’s settle this once and for all: here’s your guide to credit score explained! Learn what is a credit score and how you can manage yours!

credit score explained
When you finally understand your credit score

Credit scores explained simply

A credit score is what tells potential lenders how much of a risk you are when it comes to finances. If you have a good credit rating – they are more likely to offer you credit. If your credit score is poor, lenders will be more likely to turn you down or charge you higher fees.

Lenders will look at your credit score and try to predict if you are likely to make repayments on time and in full, or whether you are likely to default and have problems paying.

Credit rating agencies

In the UK, there is no singular credit score; you have three. This is because there are three main credit agencies: Equifax, Experian and TransUnion. They all use different methods to calculate your credit score, meaning each one will be different.

TransUnion

TransUnion grade your credit on a rating between one and five; one being the worst and five being the best. Below are their grading bands:

  • Very poor: 0 – 550 (rating 1)
  • Poor: 551 – 565 (rating 2)
  • Fair: 566 – 603 (rating 3
  • Good: 604 – 627 (rating 4)
  • Very good: 628 – 710 (rating 5)

710 is the highest possible credit score with TransUnion.

Experian

  • Very poor: 0 – 560
  • Poor: 561 – 720
  • Fair: 721 – 880
  • Good: 881 – 960
  • Very good: 961 – 999

999 is the highest possible credit score with Experian

Equifax

  • Very poor: 0 – 279
  • Poor: 280 – 379
  • Fair: 380 – 419
  • Good: 420 – 465
  • Very good: 466 – 700

700 is the highest possible score with Equifax

The importance of having a good credit score explained

There are many reasons why it is important to have at least a fair credit score, ideally good or excellent. If you are hoping to buy a house and get a mortgage, your credit score will need to be in great shape. This will improve your chances to be accepted and take advantage of the very best rates. Having a good credit rating also means that you are more likely to be offered the best rates and terms for any contract. This is crucial when taking out credit cards, loans, but even a phone contract. 

What does a poor credit score mean? It is important to bear in mind that having a poor or very poor credit score does not necessarily mean that you will be refused all forms of credit, although it does make it more likely. However, lenders will see you as more of financial risk. They might offer you higher interest rates and shorter purchase and balance transfer offers.

Before you make an application for any credit, it is worth checking your eligibility and if you are likely to be accepted. Keep in mind, that each application is recorded on your report and can be detrimental if you are refused.

How can I boost my credit score?

Keep an eye on your credit report

The three credit rating agencies, which we have listed above, occasionally make mistakes.  By regularly checking into your credit report you can keep an eye on what is going on. Try to do this ideally once a month. If something that you don’t recognise crops up, you can deal with it sooner rather than later. 

Register to vote and increase your credit score

Credit agencies look at the electoral roll as proof of address. If you are not registered on it, it can make it much more difficult to get credit. Make sure you are on it and update it as soon as possible after moving house. It is really simple to do by following the online guidance.  Speaking of moving house; doing it often in a short time frame can also be a red flag to lenders. If you can’t register to vote or are not eligible to vote in the UK, then make sure you send proof of residency into all three of the credit agencies. This must prove that you live in the UK – utility bills, council tax bill or UK driving license is probably sufficient. 

Key for your credit score: Never miss credit repayments or pay them late

This is one of the most obvious but also the most important, so worth a mention. Just missing one payment or paying a couple late can cause you problems for years – six years, according to Experian. Even if you are struggling, try not to default. Set up a direct debit so that you pay the amount of money automatically every month. If you really can’t pay it, get in touch with your creditor and see what they can do. It won’t necessarily help your credit score, but it can stop further, more serious action such as county court judgements being taken against you.

Check your partner’s credit score before you join financially

Thinking of opening a joint bank account with your new partner? Think carefully and check that they do not have a poor credit score. It doesn’t matter how good yours is; if you are financially linked in any way, your credit rating could be affected. In this case, it is worth keeping your finances completely separate until theirs has improved and you can be sure that they are financially stable. In the same vein, if you split up with someone, it is important to unlink yourself financially. This means closing any joint bank accounts. You should also write to the credit agencies and ask for a notice of disassociation – but they can only do this if you no longer share any financial link.

Minimise the number of applications you make

There’s a bit of a catch-22 when it comes to making an application for credit. You won’t know if you will be accepted until you apply, but if you apply and get rejected, it will leave a footprint on your file. Too many of them in a short space of time will damage your credit score.

Credit builder card and credit building loans

There are some credit cards available targeted at those with poor or no credit history. These usually have incredibly high interest rates – sometimes as high as 35%, but providing you pay the balance off every month in full and don’t withdraw cash.  Buy something regularly each month – perhaps your grocery shopping – and pay it off straight away. Over time, this will help you build your credit. You can also use credit building loans, which can help you build your credit score.

Use Wollit to increase your credit score

You can also try credit building programmes like Wollit. We help you build your credit history each month just by being a member. Each of your payments will be added to your credit history and will improve your score. Beyond credit building, we can also provide you with some custom money management tools and a smoother income.

Frequently Asked Questions about Credit Scores Explained

Can I be blacklisted for credit?

No. In the UK, there is no blacklist, even if your credit score is zero. Of course, if your credit score is very poor, the chances of getting credit with a standard lender are much slimmer, but that does not mean it is impossible. There are credit cards and other lenders who specialise in helping people with bad credit. It is not just your credit score that lenders will look at either; it is just one of many things that they use to paint an overall picture of you and your financial behaviour. For example, if you have borrowed from them in your recent past and have paid them back on time, they may be more open to lending to you in the future.

If I have never borrowed money before, this will help me, right?

Believe it or not, no. It can actually go against you. Think of it this way – if you have no credit history whatsoever, how are lenders going to decide on how reliable you are at paying back money you have borrowed? While everyone starts off with no credit history when we turn 18 (because credit cannot be offered to those who are under 18), most of us build it up with things like mobile phone contracts or pay monthly car insurance. If you don’t have any credit background, look at joining Wollit, as the monthly membership payments help to build your score.

If I live with someone with a bad credit history, will this affect my own credit score?

Joint credit scores explained here

As long as you are not financially linked in any way, such as having a mortgage together, joint credit card or bank account or so on, no, you will not be penalised for living with someone with poor credit history. However, before you enter into a financial commitment with someone – a new partner, for example – it is important to ask questions and check first, because once you are linked financially, it can affect your own score.

What appears on your credit report and impacts your credit score explained

Do missed council tax payments show up on my credit file?

Unless you have a County Court Judgement against your name for non-payment, missed or late council tax payments will not show up on your credit score, as they are not a form of credit. The same goes for things such as parking fines and student loans taken out prior to 1998.

Does my credit record show my income or salary?

No. However, you will almost definitely be asked this by all lenders to make sure that you can afford repayments. Do not be tempted to lie or exaggerate – by lying on an application form you are committing fraud – and fraud is a crime. 

How can you check your credit score?

As mentioned, there are three credit agencies in the UK so to check your credit report, you need to look at one, or all, of them. You can find out where to check your credit report here. 

By law, you are entitled to access your credit report for free. They give you a brief overview of your credit history, but do not give you your credit score. If you want to see this, you will have to pay a fee, usually monthly. You can also get an idea of how healthy your score is by using a credit checking service such as ClearScore.

These will provide you with unlimited access to your report, your score, and other services such as alerting you to any significant changes to your credit score. 

It is important to be aware of what your credit rating is, what it means and how it can impact on your ability to obtain credit in the future. It is not something that you can turn down or decline; everyone is assigned a credit report when they turn 18 in the UK, and you cannot amend the score. What you can do is make sure you pay your bills on time, look at ways of building up your score and keeping an eye on it for possible fraudulent applications.  By doing this, you improve your score and your chances of getting approved for credit cards, loans and mortgages. Anything we left out of your credit score explained? Let us know in the comments!

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