Credit Score Basics > How your credit score is calculated and why it matters

How your credit score is calculated and why it matters

7 minute read · Updated 9th April 2024

So you've seen your credit score a few times. You might even have an app to check your credit score. But you still have no idea how that magic number, your credit score is calculated. It's time to add some clarity and see why your magic number matters!

Why and when your credit score matters

Have you ever been there and had 'that' feeling? You know the one. You've had your eye on something for a while now. You know you could never hope to pay for it outright. Maybe it was that shiny new laptop that you just can't live without. Perhaps it was that car that you've dreamt of for longer than you care to admit. You've finally got yourself to the shop where you need to be. No matter what, you're going home with it today. And then it comes. The salesperson has been busy taking your information. You watch with a sense of anticipation, as their finger is just about to drop and hit the enter key. In that second, your fate is in that little digit. That digit, in turn, is going to return the three digits that rule your life: a credit score!

Okay, so perhaps that is slightly dramatic. Although there's a very true point here. As well as ruining your day, your credit score can have a serious impact on your life. From being able to afford some credit, your credit score can also influence if you can get a job, a rental contract or a utility deal. It basically shows lenders, banks and other service providers how trustworthy and responsible you are - especially when it comes to money.

What is a credit score anyway?

Once upon a time, in a land far far away, life was simple. If you wanted something, you would pay for it. If you couldn't quite afford it, you'd save for it.

Rightly or wrongly, we all became slightly impatient. We all wanted things now. Saving for months, or even years, just wasn't an option anymore. We would then go and see Mr. Banks. Perhaps somewhat unsurprisingly, Mr. Banks was our local bank manager. Mr. Banks also happened to be our neighbour and knew us very well. Mr. Banks thought we were a decent sort of chap, so he'd happily see to it that we could borrow money from his bank.

Unfortunately for Mr. Banks, he was only partially right. Indeed, we all seemed like a decent kind of folk. What poor Mr. Banks didn't know was that only last week we'd borrowed from Mr. N West, who lived up the road. The week before that we'd also borrowed a little more from Mr. C Operative. And the week before that, and the week before that, and the week before that! The major problem with all of this was that Mr. Banks had no idea that not once had we repaid what we had borrowed!

Time for a little seriousness

So a return from a fairytale land. Hopefully, you can now see the point we're making. Banks and other institutions lend us money purely to make money. For some time now, it has no longer been good enough just for you to be a friend of a friend of a bank manager.

We have developed a culture with an 'I want it now' attitude. There is nothing wrong with this per se, but as this culture has grown, so has the lending sector who are (more so since the credit crunch of 2007) increasingly risk-averse.

Briefly returning to our tale of Mr. Banks, financial institutions will no longer make this kind of mistake. Instead, they will assess you. They will assess me. They will assess all of us. We may be individuals with distinct personalities and traits but, when it comes to our chances of borrowing, we are only a number. That number can be quite revealing; along with all the facts held about us by credit reference agencies, it may go some way to deciding the outcome of that mortgage or loan application.

Your credit score, in simple terms, shows a lender the probability that you will repay your debt. It is by no means foolproof. It does however go some way to allowing lenders to mitigate their level of risk.

Being allocated a number that can have such far-reaching effects is tough. Not having any understanding as to where that number comes from is even tougher. Knowing how your credit score is calculated is not necessarily the most exciting of topics. It is, however, important.

In the UK, there is no uniform way of rating your creditworthiness. Each lender will have their own criteria that they will be looking for when you apply for a financial product. The, albeit annoying, truth is that these criteria vary from bank to bank, from institution to institution. Even more annoyingly, these criteria appear more closely guarded than any state secret!

So, how is my credit score calculated?

Despite the secrecy displayed by lenders, you can absolutely access this all-important number and even take action to make positive changes.

Take control of your credit score.

The UK has 3 credit reference agencies. These agencies hold a multitude of information on us. They share this information with financial institutions when we apply for products such as credit cards, car finance, loans, and mortgages.

The 3 agencies that compile and hold all of this information are:

Experian,
Equifax, and
TransUnion (formerly known as Callcredit).

Although each institution will have its own set of criteria, each will consult at least one of these agencies to assist in making a lending decision. The information that the agencies hold about you comes from 5 key sources:

Account data

Any financial organisation that you interact with, be that banks, building societies, or utility companies, amongst others, will share the details of your account conduct from the last 6 years. This means that other lenders can see how you have managed your accounts. Do you pay on time? Have you missed payments? Are you maxing out your credit limit?

Court records

If you have any County Court Judgements (CCJs), IVAs, or bankruptcies, the agencies will also hold a record of this information.

Electoral roll information

The publicly available register shows your address and address history.

Search, address, and linked data

This is a record of addresses that you are associated with, people that you are financially linked to, as well as records of searches other lenders made on you.

Fraud information

If you have previously committed fraud, this information will also be recorded.

How much information do they hold on me?

The information listed above is what creates your credit file. This is the information that credit agencies will use in how they calculate your credit score. This is also the information that they will share with lenders when you make an application.

Myths abound about what information is held and shared

It is just as important to understand what information credit agencies do not hold or share:

Your credit score - Now this one may sound slightly surprising, so let me explain. Experian, Equifax, and TransUnion all generate a credit score for you based on the information that they hold. This score is for your eyes only. Lenders do not see the score that you have been given. Instead, they have access to information that has led to the agencies settling on their score.

Your income - No details of your earnings appear on your credit file.

Your relationship status - Whether you are married, living with a partner, or in a civil partnership, this information is not present on your credit file. The only way you can see someone else within your credit file is if you have a financial link to them. This link usually means you have a joint financial product, like a joint bank account.

Declined applications - Every time you make a credit application it creates a record on your file. However, the outcome of your application is not recorded. Approved or declined, your file doesn't show this.

Criminal history - Your credit report does not have references to any criminal convictions.

Just because these factors are not listed on your credit file does not mean that lenders will not know about them! They may simply ask you. If they do ask, via an application form or any other means, then you are obliged to tell the truth. Anything else would be classed as fraud.

Make your number work for you

Knowing what is contained in your credit file, understanding what influences your score, and appreciating what is shared with lenders means you can start to take some control. You can have a direct impact on these numbers and make a difference in how credit reference agencies and potential lenders view you.

Even if your actual credit score isn't shared with lenders, knowing how your credit score was calculated and what it is can provide you with a snapshot of your creditworthiness. Your number may vary, depending upon which agency you are inquiring with:

Experian. Credit scores range from 0-999
Equifax. Credit scores range from 0-1000
TransUnion. Credit scores range from 0-710

The fact that the agencies all have different ranges is unsurprising that you may have a different score with each of them. Equally unsurprising, a higher number is indicative of greater creditworthiness.

Key actions you can take to get that credit score up

Now, some of this may be obvious and others less so, but here are the things you can do to influence that credit score:

Make sure that you are paying and make sure that you are paying on time! If you are missing payments, your lender will report this to the credit agencies. Likewise, if your payments are late, this will be reported too. Consider using direct debits for all of your payments, so there is no chance of you simply forgetting.
Ensure that you are registered to vote. If you are not registered, then do this now.
Consider who you are financially linked to. You are only classed as being financially linked to someone if you have a joint financial product. This could be a joint mortgage, a loan where you are a joint applicant, or even when utility bills where you are named with another party. If this is the case, it means that when you apply for credit again, the person you are linked to is also viewed and taken into consideration. If you are in a relationship and have joint financial products when it comes to separating, it is important that you unlink yourselves financially as well.
Don't max out your credit limits. If you have a credit card with a £1000 limit don't constantly be around the upper limit of what you can borrow. Lenders will take note if you are rarely decreasing your debt and are spending the maximum amount you are able to. It may set alarm bells ringing and make it difficult to take on any further borrowing.
Don't continually apply for new products. If you are declined by one lender, don't keep applying and applying in the hope that someone will finally accept you. As we saw earlier, lenders can not see that you have been declined. It doesn't however take a genius to see a pattern and infer what has happened.

Consistency counts

Lenders would like to see some stability from you and consistency across your applications. Being with the same bank for a number of years, not changing your job on a regular basis, a long period of living at the same address, and keeping the same personal details can all help.

Those that fall foul of this desire from lenders to have stability are usually those that rent their homes and the self-employed.

Renting

Whilst homeowners tend to be at the same address for a longer period of time and also have mortgage payments that are reported to credit agencies, renters lack these luxuries. The good news is though that there is a relatively new way in which renters can use their payment history to benefit their credit file. Assuming you pay your rent on time, this can have a beneficial impact on your credit score.

Self-employed

It can be difficult to maintain stability when self-employed. Your income may vary from month to month and this can, at times, lead to missed or late payments. Both of these have a negative effect on your credit score. It's could to keep a little spare cash to make sure you can always cover your essential costs.

Whilst we may never know quite what criteria a lender will use when you apply for any financial product, we can be clear that the days of Mr. Banks are long gone. Although our credit score is not shared with lenders, the information contained in our report is. So, it is not just about how your credit score is calculated but what is it calculated from. Ensure that this information is accurate by checking it on a regular basis and work to push your score up. A high score doesn't necessarily equal acceptance, but you certainly have a much better chance! Having some understanding as to how your credit score is calculated can help you achieve this.