Your credit report and credit score play a vital role in modern life. You can hardly do anything with money without it, but too few people know what it is or how it works.
That ends today.
I’m going to outline the basics of what a credit score is, why we use them and how it is calculated.
By the end, you’ll have a much better idea of the machinations that govern all our financial lives.
What is a credit score?
A credit score is just a number and you actually have three of them, not just one.
Each credit reference agency (CRA), Experian, Equifax and TransUnion has their own scoring system and will each score you in their own unique way.
That’s why you’ll often see recommendations to check all three credit scores before borrowing big, like getting a mortgage or something.
As each agency calculates scores in different ways, no two scores will be the same.
Your score is calculated from your credit history. This is the report you get when you request it from the agency with your score and lots of other information.
Every time you borrow money, use your credit card or apply for a loan, it will be recorded on your credit report.
This is so lenders can get a picture of your financial history and what you have going on.
Now friendly neighbourhood bank managers are a thing of the past, this is the only way a lender who has never even heard of you before gets an idea of your financial situation.
Credit scoring isn’t always the fairest system but it’s the only one we have right now.
How is your credit score calculated?
Your credit made up of lots of information to do with how you manage credit, how much you borrow and how reliably you pay it back.
It will take into account:
- Your personal information
- Public records
- Your payment history
- Credit utilisation
- Type of credit you’re using
- Any new credit
- Length of credit history and age of accounts
- Number and date of hard enquiries
Let’s take a quick look at each of those.
Your personal information
Your personal information includes your name, address, time at address, postcode, salary, profession, whether you own your current home or not and whether you’re married and have a family.
This provides a broad picture of your financial situation.
Public records
Public records include whether you’re on the electoral register or not, any recorded bankruptcies, county court judgements (CCJs), record of any name changes and any record of identity theft.
This provides a little background of you as a person and potential financial risk.
Note: Public records are only visible for 6 years in the UK. After that, history is history.
Your payment history
Your payment history is probably the most important part of your credit history and your score. This has the most influence over whether someone will lend to you and what interest rate you’ll get.
This shows a potential lender whether you pay on time or whether you borrow more than you can afford.
Credit utilisation
Credit utilisation is another important measure as it’s to do with affordability. It calculates how much credit you have available versus how much you’re using.
The ‘magic number’ is less than 30% credit utilisation. If you use less than 30% of the credit you have available, you’re doing well.
This shows a lender how much credit you’re using which helps them understand how you live with credit and whether you can afford more.
Type of credit you’re using
The type of credit you’re using assesses revolving credit (credit and store cards) and instalment credit (mortgages and personal loans).
The more accounts you have in good standing, the better you can obviously balance your financial life.
This helps paint the picture of how you manage finances and credit.
Any new credit
Any new credit applications show a lender whether you’re trying to access too much credit at once. If a lender sees multiple credit applications in a short time, they will want to know why.
Length of credit history and age of accounts
Length of credit history and age of accounts shows a lender that you’re able to manage accounts over the long term and keep them in good standing.
The longer you have a particular account, the more it positively impacts your credit score.
Number and date of hard enquiries
The number and date of hard enquiries works with any new credit to highlight any recent credit applications.
A lender is going to want to know why you are applying for multiple loans or cards at once, so this is where they look.
Each of these elements are weighted and given an individual score by each reference agency. The combined score of each is your credit score.
Note: Hard enquiries stay on your credit report for 2 years.
What is a good credit score?
As I mentioned at the top, each credit reference agency works in a slightly different way and scores differently.
That’s why you’ll have three credit scores, not just one.
According to HSHBC, credit scores fit into these ranges:
| CRA | Excellent | Good | Fair |
| Experian | 961 to 999 | 881 to 960 | 721 to 880 |
| Equifax | 466 to 700 | 420 to 465 | 380 to 419 |
| TransUnion | 628 to 710 | 604 to 627 | 566 to 603 |
As you can see, there’s definite variation in what constitutes a good credit score and what doesn’t depending on the CRA you use.
Whenever you check your score, you should see a helpful marker telling you whether it’s a good credit score or not. Otherwise, note the CRA you’re using and refer to the table above to make your own assessment.
Credit scores and you
Credit reports and scores may seem overly complicated but it’s the only way a lender gets to know whether you’re a safe risk or not.
It isn’t the best system in the world but it’s the system we must work with.
Pay your debts on time all the time, manage your finances sensibly and you should have no trouble keeping your score high.
If the worst happens, there are always ways to repair your score so it’s not the end of the world.
