Before you build or rebuild your credit score, it helps to understand how a credit score works. Here, we look at what a credit score is, how it’s worked out and how you can find out why it might be affecting your ability to get credit.
Credit score explained
- Your credit report, which is a record of how you’ve managed your credit in the past.
- This credit could include everything from mobile phone contracts to mortgages.
- The higher your credit score, the more likely it is that you’ll be accepted for credit and receive better rates of interest.
We talk about a ‘credit score’ but it's important to understand that you don't have one single credit score. In reality each lender calculates your credit score slightly differently, depending on what they look for in potential borrowers. For instance, even if your credit history has stopped a mainstream lender from offering you credit, a specialist lender might still consider you.
A high (good) credit score means you'll qualify for better products. This usually means you’ll get credit at a lower rate of interest or with added perks, like a long 0% balance transfer period. A low credit score means you might have to pay more interest for your credit, or you might not be able to borrow at all if the lender thinks that you’re too much of a risk.
What is a good credit score?
A good credit score means lenders see you as a lower risk. So, a higher credit score will increase your chances of getting approved for a loan or a credit card you want. You might get offered a credit card at a low-interest rate or with higher credit limits. However, every lender has different criteria that you must meet in order to get accepted for a credit card or loan.
What affects your credit score?
Your payment history: This is an essential factor when it comes to credit scores, and even one missed payment can harm your score. Ultimately, before lenders agree to take you on as a customer, they need to be confident that you will pay back your debt on time. If you have a history of late or missed payments, this can have a negative impact on your score, with each missed payment hanging around on your report.
Your available credit: Having several different lines of credit is always positive with lenders unless you are close to the limit on all of them, as this suggests that you have become reliant on borrowing. Paying your credit card balance in full at the end of each month will help you avoid interest charges.
Too many hard credit searches: Getting turned down for credit is always frustrating, but resist the temptation to keep applying to different lenders if you are rejected. Multiple applications mean multiple hard searches on your credit file, and too many in a short space of time can put a big dent in your credit score.
Negative information: Late or missed payments, county court judgements (CCJs), debt relief orders (DROs), individual voluntary arrangements (IVAs) or bankruptcy are all examples of negative information that can appear in your credit file. While a missed payment will stay on your report for six months, things like CCJs and IVAs can have an impact for six years after they have been repaired, although you can lessen the impact over time by managing your money correctly.
How to check your credit score
Checking your own credit report won’t have any impact on your score or affect your chances of being accepted for credit. In fact, it will give you an idea of what affects your credit score.
While lenders won't tell you what credit score they gave you, a lender must tell you which credit reference agency they used to calculate it. You can then visit this agency's website and, for a small fee, get the same information lenders see when they check your credit reference file.
Check your credit score for free
If you don’t want to pay to see your credit score, you could sign up to a free credit-checking service such as ClearScore or Noddle. It’s also a good idea to do an eligibility check with your lender before you apply.
How your credit score is calculated
The company you apply to for credit will check your credit reference file (also known as credit history) with one of the three main credit reference agencies - Equifax, Experian, and TransUnion. These agencies share information with building societies, banks, and retailers to build a picture of how likely you are to repay money lent to you.
Alongside their own system, lenders will use this information to calculate your credit score. This is usually based on your credit history, your application and any other information the lender already has about you. This information could include:
Some lenders might give you a lower score if you don't have a full-time job. Find out more about getting a credit card if you’re on a low income.
The type of credit you’re applying for
Applications for a credit card will be scored differently to an application for a loan. Your credit rating might be better if you’re applying for a secured loan, because your property is used as security in the event that you aren’t able to make any repayments.
The amount of credit you currently have
Already having a number of credit agreements, such as overdrafts, loans and credit cards, can affect your score. If you’re close to the credit limit on these agreements, your score may also be affected.
The number of applications you’ve made
Every time you apply for credit or someone checks your credit history, this is recorded on your credit file. Your credit score might be lowered if lots of credit enquiries have been made about you over a short period of time. That’s because this can make lenders think that you’re desperate for credit, or struggling with bill payments.
Put simply, there's no easy way to tell what credit score a lender will give you and most lenders won't tell you your score even if you ask. Even so, you can always check your credit history and this might tell you in advance how likely it is that your application will be successful.
What is a Credit Check?
A credit check is when a company or individual looks at your credit report to understand your financial habits. This could be a landlord, employers or financial services. This is also sometimes called a credit search, and shows how well you manage your money and whether you pay back your credit on time. It also checks the credit history of anyone you have any financial links with, like a partner you share a bank account with.
There are two types of credit check:
- Hard credit check - When you make an application for credit, this is recorded on your credit report as a ‘hard check’. This means that any company searching your credit report will be able to see that you’ve applied for credit. Having too many hard checks in a short period of time
- Soft credit check - These credit checks don’t leave any trace on your credit report, and are usually carried out by employers or lenders who offer an eligibility check for an instant initial decision. It’s worth noting that not every lender offers this option, so take care when you apply. For more information on ‘soft searches’ please see our express check guide page.
Why lenders need your credit history
When they check your credit history, a lender’s main goal is to work out how risky it will be for them to lend to you. It’s important to keep checking your own credit scores to make sure they stay as high as possible, but keep in mind that your credit score is just one of many ways that lenders will assess your credit stability. It’s also worth remembering that checking your file does not hurt your credit history, but making too many unsuccessful applications will. If you've been turned down by a lender, it's better to check your file before you apply to another one.
You can view an example of an Experian credit report here. You’ll notice that as well as your individual score itself, the agency should give you helpful information about the positive and negative factors affecting your credit history. You might see things like missed payments on bills or credit cards, which will have caused damage to your score.
In general, you can use this as a guideline to understand how lenders will see you, and if your credit score is low, take action to improve it before you apply again.
Credit score range
There's no 'magic' number when it comes to your credit score, and each lender will look for different things in potential customers. While you might be a perfect potential customer for one lender, you might find you’re rejected by others.
The three main credit reference agencies use their own scoring system, so there’s no one single figure that represents a ‘good’ or ‘bad’ credit score. However, you should aim to achieve a ‘good’ or ‘excellent’ score.
To help you find out more about your credit score or your borrowing options, here’s some useful information from Vanquis Bank.
How to Improve Your Credit Rating
One of the most common credit score myths is that certain ‘quick fixes’ can rapidly and dramatically improve your score. Sadly, this isn’t the case. Building your credit score actually takes a combination of patience, good financial management and using the right products. Check our page on improving your credit score for more information.
Secured and Unsecured Cards
Most credit cards are ‘unsecured’. This means you can borrow on them without putting down a deposit or using your possessions as a guarantee that you’ll repay the debt. There are other options available too. Although they are rare, ‘secured’ credit cards don't usually require a credit check. Instead, you’ll usually be asked to put down a cash deposit as security against your borrowing. If you miss payments, the lender will be able to take some, or all of the deposit to repay what you owe them. For more information, please see our Secured vs. Unsecured Cards page.