Credit explained: What is a credit score and how to improve it
Pretty much every adult in the UK has a credit score, but many of us don’t understand exactly what they are. Talking about money and credit with friends and family can be a daunting prospect for many. On top of this, most of us weren’t taught about credit cards, files, or scores when we were growing up, so a lot of us have very limited information.
To help you understand more about your finances, this H&T blog covers all the essential information you need to know about credit, from what’s on your credit file to how to build your credit score.
Disclaimer: Please be advised, we’ve written this blog to share some of our thoughts and ideas, if you are in need of free and impartial financial advice, please speak to The Money Advice Service.
What is a credit score?
All financially active UK citizens aged 18 or over have a credit file which is a collection of information relating to who you are, where you live, and certain financial details spanning the last 6 years. This information is used to generate a credit score which is a three-digit number providing lenders, such as credit card and personal loan companies, an indication of how well you manage your money.
If you’ve missed or are late in making payments on an existing credit or loan arrangement, this can negatively impact your credit score. Your score may also be used by other companies when you apply for certain services, such as phone contracts or household utilities, for example.
You also have more than one credit file. UK data is held by three main credit reference agencies: TransUnion, Experian, and Equifax. Lenders may use one, two or all three when making a lending decision. We’d always suggest that you check your credit report with all three credit referencing agencies to ensure they are accurate.
Why should I check my credit file?
It’s a good idea to check your credit file with each of the three main credit reference agencies to ensure your information is correct and up to date. Checking your report regularly for any mistakes is very important, as anything that can’t be removed will stay on your file for 6 years; potentially affecting your financial options in the years to come. Here’s the information you will find on your credit file, and why it’s there:
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The information on your credit file |
Why it’s included on your credit file |
How it benefits you |
Issues to watch out for |
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Your full name and address. |
This is essential information which allows companies to be sure they’ve got the right information for the right person. |
Having your name and address correct and up to date ensures you are provided with your full and current credit report to check everything is relevant and there’s no adverse data showing. |
Make sure everything is spelt correctly and is fully up to date – if not, a lender may not be confident that you are who you say you are. |
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Your electoral registration. |
It gives companies another layer of security when it comes to validating you at your current address. |
You are further protected from identity theft and fraud. |
If you are not registered on the electoral register, or if you are registered to a previous address, some lenders may not process your application further; it’s the law to register. |
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Court records which indicate debt issues. |
If you have had a CCJ (County Court Judgement), IVA (Individual Voluntary Agreement), Bankruptcy, or any other court debt orders, then this shows the lender that you have failed to repay in the past. |
Allowing lenders and other companies to see this information protects you from being offered credit that you may not be able to repay in your current circumstances. Remember, only the last 6 years are taken into consideration, so it is possible to improve this area if you need to. |
If you’ve been affected by any of these debt-related court orders in the past, make sure the details are all correct. If the debt isn’t removed from your file after 6 years or you wish to correct the status of the debt, then you can dispute this with the credit referencing agency directly. |
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Previous addresses and people you are linked with financially. |
As well as helping to validate your identity, this information provides the lenders with a full picture of your credit history and can protect you and the lender from over indebtedness. |
Any information which helps to prove your identity protects you from fraud, so past addresses being present is often a good thing. Additionally, if you have a joint account, card or loan with someone whose credit score is very good, your own may receive a boost as a result. |
Lenders will often take into consideration anyone who you are financially associated with when assessing your ability to pay back what you’ve borrowed. If you still have joint accounts open with past housemates or an ex-partner, this can affect the outcome of a credit application. |
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Account behaviour for any and all credit/store cards, unsecured loans, mortgages, bank accounts, mobile contracts and energy bills. |
Your previous account performance lets your lenders know whether you’ve been able to pay credit on time, how you manage your credit card(s), whether you keep up with mortgage and utility payments and whether you have an overdraft on your current account, among other things. |
You need to be able to show you can handle credit in order to boost your score. If you have been good at keeping up with your repayments, all of this will automatically be listed on your credit file and over time you’ll find you can get better interest rates and a wider choice. |
Any incorrect information here can really affect your rating, so it’s really important that you check for any discrepancies. If you have paid off a loan and the account is yet to be officially closed, contact the original lender and request that they amend the account to show in its current state. |
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Who has searched your file. |
Lenders will want to see if you have made other applications, particularly ones very recently. This is because it may change what you have declared as your current financial situation. |
As long as you are measured in the number of applications you make, this can show that you have put thought into your financial situation and acted accordingly. If you have only applied to one or two places at a time, you’ll look more favourable as a customer. |
If you do not recognise the company who has performed the search or you believe the search has been conducted without your consent, you must flag this with both the company and the credit referencing agency, as it may indicate fraud. |
How can I check my credit score and file?
If you want to check your credit files to make sure all your information is up to date, or simply to get an idea of your credit health, the good news is that you can do so online for free. You have credit reports from three agencies: Equifax, Experian, and TransUnion (Money Saving Expert). To check each of these, you can use:
- MSE Credit Club for your Experian credit report
- Clearscore for your Equifax credit report
- Credit Karma for your TransUnion credit report
The different types of credit card available
Credit cards are a common borrowing tool, but if you’ve never had one before, the array of choices can be overwhelming. Here, we’ll break down the different types of credit cards available and explain how they’re suited to different types of spending.
Credit cards are certainly not a ‘one size fits all’ financial service, and the ideal card for one person could cause potential financial difficulties for someone else. Picking the right credit card depends on the nature of your household finances and your spending habits. Understanding the benefits and potential pitfalls that each option can bring is a fundamental step in the right direction when determining the best one for you.
‘All-round’ credit cards
All-round credit cards allow you to both spend with them and transfer other debts to them – which is known as a balance transfer. It’s worth nothing that some balance transfers involve a charge. Credit cards like this are common, and the interest rates can be set at anything up to 40% APR, with certain cards offering initial low rates, which will then rise after a set time.
Cards like this are convenient, but if you need both spending and options, you may do better with two separate cards which are each tailored to just one of these needs. Cards offering single options are more likely to offer good deals and rewards, so you may find that you save money in the long run. This also has the benefit of essentially doubling the positive effects on your credit file, providing both cards are being paid off properly.
0% credit cards
A 0% credit card is one that charges 0% interest for a set period of time when you use it for purchases, or to pay off other debt. Many people use a specialised 0% balance transfer credit card, where it is used to pay off more expensive debt(s) but cannot be used for spending. This helps the card owner to avoid some or all of the interest payments on the original, higher interest borrowing.
The 0% interest on these cards will only last for a certain number of months and you are usually required to pay a minimum each month in order to keep the 0% interest benefit. For this reason, they are best for spreading the cost of a large purchase, with a solid budget in place to ensure the payments can be kept up. If you are unable to adhere to the terms of the 0% benefit, then you may incur high interest rates and charges, making it a very expensive card indeed.
Travel credit cards
Travel credit cards allow you more flexibility when spending in foreign countries or on overseas websites. Non-travel credit cards tend to add fees when you use them abroad, making them more expensive. When using a travel credit card abroad however, you can enjoy the same excellent exchange rate that your bank uses, making it one of the cheapest ways of spending in a foreign currency.
This benefit will only remain a benefit if the balance is paid in full, of course, as added interest will overtake the amount gained from avoiding foreign currency fees. Cards like this can be useful in the short-term to help pay for holiday expenses in a cheaper, more convenient way, but only if you’ve already put aside or budgeted for the amount you want to spend.
Credit builder cards
A credit builder card is excellent for first time borrowers looking to boost their credit score. Use of the card over time can give those with no credit history a better standing when looking to borrow in the future. However, the high interest rates mean that cards like this should be repaid on time and in-full each month. Leaving a balance on a credit builder card and only paying the minimum amount can cause the amount owed to become unmanageable.
Some of these cards do offer 0% interest for a very short time as a promotional rate, which is something that can be useful as long as the balance can be paid off before the interest rate rises. For those who are hoping to obtain finance and a mortgage in the future and have yet to build a positive credit history, this card can be used as a first step.
How to build your credit score
Building a decent credit file can take some time, but many of these tips can help to give your file a boost. Even if you think you know what your credit score is and what it says on your file, it’s always worth keeping up to date and giving it a bit of an MOT every now and again – particularly if you want to apply for unsecured credit or a mortgage in the near future.
Make sure all your information is correct
When checking your credit score, don’t just focus on what it says about your lending history. It’s just as important – if not more important – to check your name is spelled correctly, that your address is full and correct, and that any other personal details are 100% accurate. If a lender has different information to what is on your file, just one mistake can mean you are rejected for credit due to the strict rules on ID and fraud prevention. With this in mind, it’s also important to be consistent with your applications – if you have more than one name or title, or if you write your address differently, it could make a difference.
Make all required repayments
One of the most obvious ways to improve your credit score is to simply pay your debts on time. While this may sound like a no-brainer, sometimes things happen in life which can make this difficult. Where possible, pay what is owed before or on the agreed deadline and if you know you may have trouble with this, speak to your lender to work out a plan. You’re less likely to have hiccups reported on file if you communicate and show willingness to work through any problems.
Be aware of financial linking
Anyone who shares a joint account with you (such as a bank account, credit card, even utility bills) is likely to be linked up with your credit file. If you are financially linked with someone else, then their score can affect yours and vice versa. If they have a very poor credit file then this can lower your credit rating, and if theirs is much better than yours, you may get a bit of a boost. Close any joint accounts which are no longer used or relevant, such as accounts held with an ex-partner or old housemates.
Don’t apply for too much at once
Lots of applications over a short period of time – whether they result in your loan being approved or not – will mark your file and tell a story. While it may seem prudent to apply to lots of different places to up your chances, this can actually be harmful. Ask lenders to do a ‘soft search’ where possible, so that it doesn’t show on your file.
You should also avoid having too many avenues of credit open at once. For instance, if you have multiple credit cards but only really use one or two, it’s best to cancel the rest. Just because your credit limit allows it, you don’t have to use it all.
Wait for past issues to ‘run out’
If you have CCJs (County Court Judgements), IVAs (Individual Voluntary Agreements) or bankruptcy listed on your file, then it’s likely you’ll have trouble being approved for credit from most lenders. However, your credit file will only list the last six years of your financial history. If you don’t have long until this deadline is up, it may be wise to wait until past problems have dropped off the list.
Avoid payday loans
Payday loans have a bad reputation within the industry and unfortunately, you may be turned down for a mortgage application simply for having a payday loan on your credit file. Even if you paid off the loan in full and on time, its presence on your file can suggest poor money management and this is what mortgage lenders prefer to avoid. Payday loans are notoriously expensive and can easily create what is known as a ‘debt spiral’, making it continually harder to escape. If you are looking for a loan which doesn’t impact your credit score, you may want to look into secured pawnbroking loans.
Report any issues to the Credit Reference Agency
Contact the relevant Credit Reference Agency directly if you see an error on their file. You may want to contact the lender as well if there are discrepancies in your borrowing information. Mistakes can simply be down to a clerical error and require flagging up before they can be fixed.
If, for whatever reason, you are unable to remove an error, you have the right to add a ‘notice of correction’ to your own credit file – this should be a short, concise, and factual explanation of the error, which lenders will be able to read when you make future applications.
Keep checking on your credit file regularly, so that any problems can be identified and resolved quickly. This will help you understand what you’re likely to be approved for and will allow you to identify what affects your credit rating over time.
After reading our blog post, hopefully you feel more confident in knowing what a credit score and file is, and how to maintain or build your score. And make sure to keep up to date with our blog for more money management tips, such as advice on creating and sticking to a budget.
REPRESENTATIVE 165.5% APR
Representative Example: Total amount of credit: £200 for 6 months. Total amount payable in one instalment: £325.88. Total charge for credit: £125.88(Interest Only). Interest rate 125.9% pa(fixed). Maximum APR 165.5 %APR. Maximum payment term up to 6 months.
Pawnbroking Loans are secured on your items, if the loan is not repaid it will be sold to pay the debt.
Authorised and regulated by the Financial Conduct Authority for Consumer Credit. (Please note that Cheque Cashing, FX, retail purchases and sales are not regulated by the FCA.)
