Credit scoring is the system that most banks and financial institutions use to assess the creditworthiness of potential borrowers. A credit score is a numerical representation of an individual's likelihood of repaying credit, with higher scores indicating greater reliability.
In the UK, credit scores are calculated by credit reference agencies such as Experian, Equifax, and TransUnion. We discuss the importance of understanding credit scoring, how it is calculated, and ways to improve your credit score in the UK.
A credit score is a three-digit number calculated based on an individual's credit history. It serves as an indication of the borrower's likelihood of repaying credit, helping lenders determine whether to approve a credit application. Your credit score is based on your credit report, which is created using information such as:
Lenders use the information provided by credit reference agencies to assess your creditworthiness. It is important to understand that there is no single credit score that is universally used by all lenders. Instead, each lender has its own criteria for evaluating credit applications, which may include their own algorithms and scoring systems.
With so many credit reference agencies to choose from, one of the easiest ways to view how all 3 view your personal credit score is to use a multi-credit report agency. Credit report agencies utilise their technology to compare what data is held about you at each of the reference agencies.
When you apply for credit, lenders use the information provided by credit reference agencies to predict your credit behaviour. This information includes your personal details, repayment history, existing credit agreements, and financial associations, amongst other factors. By analysing this data, lenders can assess the risk associated with lending to you and determine whether you are likely to repay the credit on time.
There are three main credit reference agencies in the UK that hold information on your past credit behaviour: Experian, Equifax, and TransUnion. When you make a credit application, one or more of these reference agencies may be contacted to provide a snapshot of your credit history. Each agency has its own specific method of calculating a credit score, and some lenders may use their own algorithms as well.
Experian is one of the UK's main credit reference agencies, offering reliable and accurate information that many lenders rely on when requesting your credit report. Their scoring system ranges between 0 and 999, with 'good' scores considered to be anything between 881 and 960. They also consider anything between 721 and 880 to be 'fair', at which level most lenders and finance providers are still likely to accept or consider your application.
Equifax is another major credit reference agency in the UK. Their scoring system ranges from 0 to 700, with scores between 420 and 465 considered 'good', and scores between 380 and 419 considered 'fair'. Like Experian, Equifax also provides various tools and resources to help you manage and monitor your credit score.
Formerly known as CallCredit, TransUnion is the third main credit reference agency in the UK. Their scoring system ranges from 0 to 710, with scores between 628 and 710 considered 'excellent', scores between 604 and 627 considered 'good', and scores between 566 and 603 considered 'fair'.
A good credit score in the UK varies depending on the credit reference agency used. For Experian, a 'good' score ranges between 881 and 960, while for Equifax, a 'good' score ranges between 420 and 465. A good credit score can improve your chances of being approved for loans, credit cards, and other financial products, as well as help you secure better interest rates.
A bad credit score, also known as a 'poor' credit score, can vary depending on the credit reference agency and the lender's own criteria. Generally, a bad credit score is considered to be any score below 600. Having a poor credit score can make it difficult to obtain loans, secure favourable interest rates on credit, or even access certain utility services.
The lowest credit score is 0. However, some agencies start from 300.
To check your credit score in the UK, you can use one of the credit reference agencies mentioned above (Experian, Equifax, or TransUnion). Most agencies offer free trials or free basic services that allow you to view your credit score and report. Regularly checking your credit score can help you identify areas for improvement and monitor your progress.
Several factors can influence your credit score, both positively and negatively. Some of the key factors that impact your credit score include:
Making timely payments on your credit accounts can have a positive effect on your credit score, while missed or late payments can negatively impact your score.
The amount of credit you're using relative to your available credit limit can also affect your credit score. Lower credit utilisation is generally better for your score.
Having a longer credit history with a record of responsible credit use can improve your credit score.
A diverse mix of credit types, such as credit cards, loans, and mortgages, can positively influence your credit score.
Applying for multiple credit products within a short period can have a negative impact on your score, as each application results in a hard search on your credit report.
Here are some tips to help improve your credit score in the UK:
If you're new to the UK, building your credit score can be a challenge, start by opening a bank account, setting up direct debits and not spending more than you have in your bank account.
Improving your credit score takes time and requires consistent effort. Depending on your starting point and the factors affecting your credit score, it could take months or even years to see significant improvements. However, by following the tips mentioned above and maintaining responsible credit habits, you can work towards building a healthier credit score over time.
Understanding credit scoring and actively managing your credit score is essential for your financial well-being. A good credit score can open doors to better financial products, lower interest rates, and increased financial security. By staying informed about your credit score, making responsible credit decisions, and taking steps to improve your credit score when needed, you can work towards a brighter financial future in the UK.
Discover why your credit score can differ on different sites.