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Lenders will consider the strength of your credit score whenever you apply for a loan, mortgage, or credit card. So, to reduce the risk of you getting rejected for certain products and potentially ending up in a worse financial position, it’s important that you check your rating on a regular basis. And, if you find that it isn’t looking as healthy as it could, you’ll need to know how to improve your credit score.

To help you get a better grasp on your finances and give you the best chance of securing whatever credit you might require in the future, we’re going to look at the ins and outs of how credit scores work. Here’s what we’re going to cover:

  • What is a credit score or rating?
  • What is the difference between a credit score and a credit report?
  • What is a good credit score?
  • What is the average UK credit score?
  • How can I check my credit score?
  • What affects my credit score?
  • How can I improve my credit score?
  • How does my credit score affect me?

Read on to find out more.

What is a credit score or rating?

Lenders will use your credit score or rating to determine whether you qualify for certain financial products, such as a credit card, loan, or mortgage. It’s calculated using the information on your credit report, as well as any additional information you supply as part of an application. Your credit score tells lenders what kind of borrower you are, and how likely it is that you’ll manage to keep up with any repayments that are agreed.

Credit is a form of borrowing, which means you’re given something with the agreement that you will pay back the cost later. Most adults have at least one form of credit, and the most common types are mortgages, loans, overdrafts, and credit cards. But, there are other situations where you will use credit: for example, if you take out a phone contract that spreads the cost out into monthly instalments. How reliable you are when it comes to making these repayments will affect whether you have a good or bad credit score.

What is the difference between a credit score and a credit report?

A credit report is a summary of your financial reliability. Think of it as somewhat of a CV that outlines your history of paying debts and other bills. It will also include information like how many bank accounts you have, as well as any outstanding debts and a list of everyone who has received a credit report for you. Credit reference agencies compile these reports, primarily using information they’ve collected from lenders.

A credit score is a number that you’re assigned based on the information in your credit report. The more reliable you are when it comes to making repayments, the higher your score will be. Think of it as a grade that summarises your credit report.

What is a good credit score?

There’s no single answer to what a good or bad credit score is, because the UK’s three main credit referencing agencies all score consumers differently:

  • Good scores from Experian start at 700
  • Good scores from Equifax start at 660
  • A good score is at least four out of five, according to Transunion's scale

What is the average credit score in the UK?

Based on Equifax’s scoring system, the average UK credit score in 2018 was 380, according to Credit Score 24. This was an improvement on the average for 2017, which was 346. With Equifax, a good score is 660 or above. So, the average credit rating in the UK isn’t the strongest and, if it’s similar to yours, you’ll want to find out how to improve your credit score.

The average credit score does vary by location. For example, Kingston upon Thames has been recorded as having the highest average credit score with 400.16, while Sunderland recorded the lowest with 318.51.

How can I check my credit score?

You should check your credit score and report on a regular basis — every couple of months should help to keep you on track. When you’re planning to apply for a financial product in the near future, it’s especially important that you check how healthy your rating is, because this will help to ensure that you don’t get any nasty surprises, and that you’ll have time to rectify any issues if necessary. There’s no reason for you to stay in the dark, because you can access all of the information you need for free. Here, we’ll explain how to check your credit score.

Lenders in the UK will typically have a preferred credit reference agency that they consult, and there are three main agencies they tend to choose from: Equifax, Experian, and Transunion Money Saving Expert recommends that you check all three credit reports at least once a year for general housekeeping but, if you're completing a specific application for a company and know which credit reference agency they use, make it a priority to check that one. There’s no such thing as checking your credit report too often: this won't show on your record, and it's something that only you and the credit reference agency will know about.

The most important thing to remember is that you have every right to check your credit reports whenever you like. It used to cost £2 a time but, since the new GDPR law came into effect, it's now free to check your report from all three agencies every month. Simply visit their websites, click through to request your free credit score, and enter your details.

What affects my credit score?

While credit reference agencies and lenders might use their own formulas to calculate your credit score, they'll typically consider a lot of the same factors. Here, we'll look at what affects your credit score.

Payment history

Your payment history will typically have the biggest effect on your credit score, either positively or negatively. If you always pay your bills on time, this will improve your credit score. However, late or missed payments will be detrimental.

Credit utilisation rate

As part of calculating your credit score, the amount of credit you have available to you will be compared to how much of that credit you're actually using. The idea is that a low credit utilisation ratio shows that you can manage your credit well, and most lenders will look for ratios of 30% or less.

For example, if you have a credit card with a credit limit of £1,000 but you only have a balance of £200, you will have a credit utilisation ratio of 20% and lenders will be more confident lending to you. On the other hand, if you max out your credit card, lenders will deem you to be a riskier borrower. So, if you’re wondering how to improve your credit score but are unable to completely pay something off, it’s still well worth reducing your borrowing as much as possible. This will go a long way towards helping you to increase your credit score.

History of credit use

Lenders like to look at your past behaviours as an indication of how you'll handle credit in the future. So, when calculating your credit score, factors such as how long you've used credit and how you've used all of your accounts will be considered. In general, long credit histories are better than shorter ones, as they'll give a clearer idea of what your credit habits are like. So, if you’re wondering how to build a credit score, it can actually be better to have well-managed debt, rather than no debt at all.

Credit mix

The kinds of credit you have is also a common credit score factor. So, lenders will look at how many credit cards and loans you have, or whether all of your credit is the same. For example, you might have a lot of store cards. Having a mix will typically give you a stronger score, so it’s worth looking at switching things up if you’re working out how to boost your credit score.

Hard inquiries

When you apply for credit, lenders will always check your score, which puts a hard inquiry on your credit report. If this happens often, it could give the impression that you pose a credit risk. Of course, there are situations where you might want to shop around for a loan or similar, and credit reference agencies understand this. As a result, if multiple inquiries of the same kind are made in a short space of time, they will generally treat this as a single inquiry, so it won’t affect your credit score.

Negative information

Your credit report will contain any negative financial information, which will outline whether you’ve had any bankruptcies, tax liens, settled accounts, or civil court judgements. Depending on your situation and the severity of it, this kind of information can negatively affect your credit score in a range of ways and for varying periods of time.

How can I improve my credit score?

If you've found that you have a bad credit rating, or you're planning to apply for a financial product and want to give yourself the best chance of success, you’ll want to know how to get a good credit score. Here, we're going to outline some of the steps you can take.

1. Register on the electoral roll

If you haven't already registered to vote, doing so could help to boost your credit score. This is because it makes it much easier for credit referencing agencies and lenders to confirm who you say you are, and that all of the information you've provided is accurate. To check whether you're on the electoral register, you'll need to contact your local Electoral Registration Officer — you can find out how to do this through Your Vote Matters.

2. Check for any mistakes in your file

It's important that you check your credit report for any mistakes — even if your address is slightly wrong, it could have an impact. Check all of your details thoroughly and arrange to have any mistakes corrected as soon as possible.

3. Make sure you aren't linked to someone with bad credit

If you’re wondering why your credit score has gone down without you doing anything to affect it, check whether you have a joint account with a partner, friend, or family member. If their credit rating isn't the healthiest, this could be dragging your score down. It’s best to take steps to close your joint accounts down if you find this to be the case.

4. Pay your bills on time

As we've mentioned, lenders will want to see proof that you can reliably make repayments. So, show them by paying your bills on time. Even just paying your monthly phone bill can help to show that you're responsible with your finances. It’s a great way to build your credit score.

5. Look out for fraudulent activity

Check over your credit report and look out for any information that doesn't actually apply to you. If someone has applied for credit under your name without you knowing or there's debt that you haven't incurred, contact the companies involved as well as the relevant credit agencies immediately. If you’re wondering why your credit score has gone down because you haven’t done anything to damage it, there’s a chance this could be the reason.

6. Reduce any debts you already have

If possible, you should eliminate any outstanding debts before applying for more credit. Banks, building societies, and credit card companies will be able to see if you already have a lot of debt, and this might make them hesitant to lend to you. At the very least, look to reduce what you owe to boost your credit score.

7. Try to limit how often you move house

If your credit report shows that you move house a lot, this might give the impression of instability. So, if your situation will allow it, it's always best to stay in each property for a significant amount of time to maintain a good credit score.

8. Take on a manageable debt

When lenders check your credit score, they’re trying to get a good idea of how well you’ve handled paying off your debts in the past. So, if you don’t have a very long credit history or you’ve struggled to make repayments in the past, taking on a manageable debt and paying it off as agreed can help to build your score.

How does my credit score affect me?

Having a bad credit score means you are more likely to be rejected for loans, and it will usually limit the amount you’re able to borrow. It can also lead to you being charged higher interest rates and fees when you do borrow. As a result, you could find yourself unable to buy your dream home or might even struggle to take out a phone contract.

On the other hand, having a good credit score means you’ll be eligible for a wider range of loan products, allowing you to get a better deal and borrow larger amounts of money.

You might be wondering if it's at all possible to get a loan, credit card, or mortgage if your credit score isn't looking its best. Here, we'll discuss what options you might still have.

Can I still get a loan with bad credit?

If you have bad credit, getting a loan can be tough, but not necessarily impossible. There are lenders out there that will still let you borrow money, although it’s worth noting that borrowing with bad credit can be more expensive.

Here at H&T, we offer secured pawn loans that allow you to borrow, even if your credit history isn’t the strongest. These loans are secured against items such as cars, antiques, jewellery, and watches, which are used as collateral if you fail to make the repayments. Offering secured loans doesn’t pose much of a risk to lenders, because the costs can be recovered one way or another. So, if you have a bad credit score, you’re likely to have more luck with going down this route.

Can I still get a mortgage with bad credit?

It's likely you'll find it difficult to secure a mortgage when you have bad credit. However, there are some lenders that will consider you, even if you've been rejected elsewhere.

A lender is always going to want to make sure that you can afford to make the repayments but, when you have a bad credit score, they're often a lot more thorough. So, it's likely that they will ask for more payslips and bank statements than usual. They will also ask about your credit problems. A lender might be willing to overlook any minor issues you've had in the past but, if you've had some serious hiccups, like a recent bankruptcy or county court judgement, you might struggle to find a lender that's willing to offer you a mortgage.

It's also important to remember that, when you have bad credit, any mortgage rates you’re offered will be higher than usual. And, the more significant the issue is, the higher the rate is likely to be. This means it’s often a good idea to look at how you can boost your credit score before applying.

Can I still get a credit card with bad credit?

The short answer is yes, you will still be able to get a credit card with bad credit. However, you might need to apply for a card that's specifically designed for people in your situation.

Credit cards for people with bad credit typically have higher interest rates and lower credit limits. They also come with fewer perks, so it's well worth carrying out plenty of research into what all of the relevant providers can offer you. However, as we’ve mentioned, taking on a manageable credit card can actually help to boost your credit score, so it’s worth shopping around.

It’s important that you’re aware of how healthy your credit score is — especially if you’re looking to apply for credit in the near future. You now know what steps you need to take to check your credit score, what a good or bad credit score is, and what you can do to build yours up if it’s looking worse for wear. Take this information on board and use it to get your finances in the best shape possible.