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What is a credit score?
A credit score is a number that suggests your creditworthiness. It takes how you've handled money in the past and uses it to predict how you'll handle it in the future.
With a higher score, you'll:
- look more trustworthy to lenders
- have better chances of being able to access credit
- and will receive lower interest rates.
A higher score is better than a lower score. And their are measures you can take to improve your credit score. A good credit score will make it easier for you to access things such as:
- loans
- credit cards
- a mortgage
- insurance
- rental property
- phone contracts.
On the flipside, a bad one will make these things more difficult to access or will result in you paying higher interest rates.
Who measures credit scores?
There are three main credit reference companies in the UK: Experian, Equifax, and TransUnion.
Confusingly, each company uses a different scale, different algorithms & factors to calculate your score. This means each company will give you a different number at the end.
The scales range from things like 0-700 to 0-1000. Higher number on one doesn't necessarily mean a better score than the other — but it is true for all that lower numbers are negative and higher numbers are positive across all credit scores.
The three companies will also give an indicator ranging from 'very poor' to 'excellent' alongside a number. You can check your credit score on their websites either with their 30-day free trials, once a month for free, or by paying.
Credit Karma is completely free and allows you to view your TransUnion credit score.
How are credit scores calculated?
Credit reference companies will look at four key factors to build up a picture of you as a borrower:
Personal information
This will include:
- your name
- address
- postcode
- salary
- marital status
- whether you have a family
- whether you rent your home or own it.
This will all help creditors understand who they're lending to and build a picture of your financial circumstances.
Credit history
This includes:
- how many credit cards you have
- the number of loans you have
- the number and size of your debts
- whether you go over your credit limit frequently
- how often you pay your bills on time.
If you have always stayed on top of your bills, your credit history will show that. If, on the other hand, you often miss payments or have a high amount of debt relative to your income, that will reflect badly on your credit history.
Enquiries
Every time that you apply for credit, you leave behind a footprint. And every time that somebody looks into your credit file (be it a lender, employer, insurer, or landlord) they leave a trace too.
Credit reference companies will look at this to gauge how much control you have over your finances. Lots of enquiries over a short space of time might suggest that you are desperate for credit or struggling with bills.
'Soft searches' are enquiries into your credit file which don't leave a footprint. They are often used to give you an idea of what your credit score will look like, without the search being visible to lenders.
Public records
This includes things like:
- insolvencies such as bankruptcies
- County Court Judgments (CCJs)
- and identity theft
These will all harm your score. That said, there are a few things that will help your financial reputation, including being on the electoral register. This helps lenders to confirm your address and make you appear more settled and stable.
People do of course make mistakes, and getting in control of your finances isn't always easy. Credit reference companies will only look as far as 6 years into the past, meaning that even if you've handled money badly, it won't follow you around for life.
How can I improve my credit score?
Prove where you live
Register on the electoral roll at your current address. You can do this even if you're living in shared accommodation or with your parents.
Pay your bills on time
It's really important to stay on top of your bills, both for your credit score and your own peace of mind. It normally takes around 6 months of paying bills on time to see an improvement in your credit score, so get in the habit of consistently staying on top of your money.
If you do miss a payment, make sure that you pay as soon as you can. If you feel like you might not be able to make a payment, make sure to let your lender know before you actually miss it. Lenders often have a short 'grace period' (where they can waive the deadline) before they report to credit reference companies.
Pay off debt
The amount of debt that you carry can have a huge impact on your credit score. It's never too late to start getting in control of your money and pay down your debts. If you are really struggling financially, reach out to a charity like StepChange and get free financial advice.
Keep your credit utilisation low
Your credit utilisation is the percentage of your credit limit that you use. For example, if your limit is £2000 and you use £1000 of that, your credit utilisation is 50%.
Bear in mind that credit utilisation spans multiple cards too. Credit reference companies view lower percentages as more positive and so will increase your score as a result. If possible, try to keep your credit utilisation under 30%, or even better under 20%. Don't forget that your credit score is about proving to lenders that you can borrow money responsibly, so a credit utilisation of around 20% will look better to lenders than one of 0%.
Don't close your credit card account, but stop using it if you're struggling to pay
Depending on how long you've had the credit card and the size of its limit, it can damage your credit score if you close the account. Your score is impacted by credit history length and in general, the longer you keep accounts open, the more your credit score will increase.
Consider credit builder cards
There are special forms of credit card out there, known as credit builder cards, which can help you build your score. These cards offer low credit limits and charge high rates of interest, meaning that you’ll need to clear your balance in full each month. As long as you always pay on time, they can be an effective way to build your score.
How can companies like Ophelos improve your score?
Paying off debt through Ophelos will help to improve your credit score. We report every payment you make back to your original creditor, who then reports it to credit reference companies.
We might offer you to do a budget assessment with Credit Kudos, which involves conducting a soft search on your credit score. Don't worry, this won't leave a footprint on your credit file.
