Your credit score is a measure that financial services companies use to decide whether to lend money to you. It helps them to understand what type of borrower you are and whether you are a high or low risk. The lower your risk, the more chance you have of getting a loan, mortgage or credit card.
Credit scores were introduced around 1989 and are based upon credit files from specialist agencies such as Experian, Equifax and TransUnion. Before this, applying for a loan or mortgage meant a dreaded interview with a diligent but cynical bank manager.
Thankfully, today’s computer systems allow credit assessment to be carried out quickly and fairly. This is fine for a person with a good credit history, but can be difficult for someone who has, perhaps, missed payments in the past.
Here we explain how to understand your credit score, whether it’s considered “good” by a lender and how you can improve it.
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What is a good credit score?
A credit agency such as Experian will use data in your credit report to calculate a credit score. This is a 3-digit number that acts as a summary of your credit report. Each agency uses its own highly secret calculation but they all produce a similar number.
Experian uses a simple description to classify its credit scores:
What do high and low scores mean?
To achieve an exceptional score, a person must have a long credit history with a mix of credit accounts (mortgages, loans and revolving debt), a history of making payments on time and restraint in keeping their credit cards below the limit.
A very poor score would indicate that the person has a history of missed repayments or bad debt, a high level of debt versus their income or of having no regular address.
How is the score calculated?
Finding and understanding your agency credit score is a useful indicator of your creditworthiness. However in practice, each lender uses its own calculation to decide whether to give you credit. They base their decision on the same factors, but follow their own policy, analysing your credit report and giving more or less weight to each factor.
It’s important to remember this when applying for credit; if one lender turns you down you may still be successful with a different lender. The key point is to understand the reason for rejection before applying again.
The factors that affect your credit score, for a typical lender, are:
Your credit history, such as mortgages, loans, hire purchase agreements and credit cards. If you have a history of always making payments on time, this will improve your score.
Your income, debts and how much credit you are already using. This will be used to determine not only your score, but also how much they are willing to lend.
Public records such as county court judgements (CCJ) and the electoral roll. A CCJ would indicate that a borrower has failed to make repayments and the creditor has applied to reclaim the money through a court order.
Credit searches made by a lender when you apply for credit
How can you improve your credit score to get a mortgage?
Moving, or buying your first home is stressful enough. It’s essential that you prepare your finances in advance, so that you don’t come unstuck on a mortgage application.
1. Weigh up your income (and your partner’s if you are making a joint application), outgoings and deposit.
2. Check the ratio between your debts and income and improve it if possible.
3. Check your credit report. This will detail all your current and previous financial history so it will take time and patience to check it thoroughly.
4. Challenge any information that is not correct. Dispute mistakes directly with the agency and include as much evidence as possible.
5. Make sure that all your on-going payments are up to date. Build a pattern of making payments on time.
6. Pay off any outstanding debts such an overdue bill, court judgment or fine. Wait for six months before making a mortgage request to allow your credit score to recover.
7. Don’t take on any new debt, this will not only worsen your debt to income ratio but will add another hit on your credit file.
How can you improve your credit score fast?
It takes time, discipline and patience to improve your credit score. Most attempts to do this quickly will backfire. However you can improve a bad credit score.
1. Pay any outstanding bills as soon as you can. Past issues will stay on your credit file, but will become less relevant over time.
2. Reduce your debt, keep credit card balances low and don’t take on new loans
3. Don’t simply move debt around, say by shifting it onto a new credit card. Make a plan to pay off the high interest credit cards first. Build a pattern of making payments on time.
4. Don’t apply for new credit cards or bank accounts and don’t close old ones.
New applications will cause a hit on your credit file, old accounts will give an impression of stability.
If you have never had credit, you will need to establish a good credit history before you can apply for a major loan such as a mortgage. Applying for a credit card is a good first step.
1. Look for a card with no annual fees and a low interest rate.
2. Apply for a card that is within your range for paying back. Use it responsibly, within your credit limit, and plan to pay it back in full each month using a direct debit.
3. Choose carefully, use a specialist website to find a card that has a high possibility of success and then apply for that card only.
4. Ask your parents to add you onto one of their cards as an authorised user
Where can you find your credit report?
You can request your credit report from one of the credit agencies. Experian, Equifax and TransUnion. If you are preparing to apply for a mortgage, request all 3 as you don’t know which agency the lender will use.
Experian offers free access to your credit score , or a paid for subscription to your credit report  with a one-month free trial. You can also request a free basic statutory report of your credit history.
Equifax via ClearScore  offers free access to your credit score and report. You can also subscribe to the Equifax credit score and report  again free for the first 30 days.
TransUnion is less widely used by lenders. You can get free access to your credit score and report via Credit Karma .
Nurture your credit score
Like it or not, your credit score will be with you all your life. It will be used to decide whether you qualify for a credit card, car loan or mortgage.
Building a good credit score will take (some of) the pain out of buying your home and will give you access to essential and luxury financial services.