Credit rating

Credit Rating

Your credit rating or credit score is a number that is used by lenders to help decide whether they can give you a loan or credit card based on your repayment and borrowing history. All of your financial pros and cons are added together and then blended down to this single number, which a creditor will check before lending anything to you. Each lender looks for different things during a credit check, but the general rule is that the better your credit score is, the more likely it is that you will be able to borrow the amount you are seeking.

Understanding your credit score

A credit score comes as a three-digit number that has been calculated using the information in your credit report. These reports continue to update every month. A credit score could help a lender determine whether you will be able to repay a debt if they agreed to lend you the money. There are multiple scoring models when it comes to credit scores, but the FICO Score is the most common one. An Experian credit score, for example, uses this model.

Credit scores do not make up part of your credit history. Instead, they are generated when a lender wants to conduct a credit check, and are typically delivered along with a credit report. They are representative of your current financial situation at that time, which is why they can go up and down depending on how you borrow.

It’s essential to understand all of the factors that determine the outcome of your credit score. Having this knowledge could help you improve your rating if it is necessary. Typically there are five factors that can have a positive or negative impact on your score depending on the way you manage your finances. These include:

  • Your payment history such as making your repayments on time or missing payments altogether
  • The amount of debt you currently have compared to how much income you make
  • The total length of time you have been using credit responsibly
  • The number of new credit accounts you have taken out recently
  • The different types of credit account that you currently have

How to improve your credit rating

Credit Rating Online

There are a lot of different things you can do to help improve your credit rating. The improvement won’t happen overnight and will most likely take patience and time on your part to get a better score. The ways you can improve your credit rating are:

  • Registering at your current address on the electoral roll. Lenders can confirm your identity in this way.
  • Build up a good credit history. If you don’t have any history, it can be challenging to calculate a score and, therefore, may result in the rating being lower.
  • Pay any debts on credit cards or loans on time and in full every month. Each account should be kept up to date with payments to show lenders that you can handle any credit they may give you responsibly.
  • Don’t max out your credit limit. How much of your credit limit that is currently used is otherwise known as credit utilisation. Having a lower percentage of your credit limit being used up is seen in a more favourable light and may lead to your score going up. When improving credit, it is suggested you keep your utilisation at 25% or below.

View your credit score for free

Various online services allow you to check your credit score for free from the three main credit reference agencies. For your credit score, Experian offers the check on their website for free. If you want a more in-depth report from any of the agencies, you will usually have to pay a small fee of £2 to receive your statutory report. As part of your credit report, you will receive information about any credit account you currently have, missed or defaulted payments, and a list of companies who have recently run a credit check along with other financial details.

Credit reference agencies

Your credit score will have been compiled by one of the three credit reference agencies (CRAs). In the UK, there are three CRAs which are Equifax, Experian, and TransUnion. These agencies create and keep your credit reports by gathering information from your credit history, compiling it into a report, and then generating a score based on their findings. All three CRAs are registered in England and authorised and regulated by the Financial Conduct Authority.

Each CRA will be sent information by the different lenders that you currently have credit with and how you are managing your account, repayments, etc. There is also other information like the electoral roll and public records that can be sent to a CRA and form part of your overall credit report. Once the CRA feels they have enough information about you, they generate your credit report and calculate your credit rating.

One thing many people question is why each credit score from a CRA is slightly different from one another. They may differ because individual lenders don’t report to all three CRAs. Instead, they may choose to report to just one or two. They also have different scoring systems depending on the agency you want to view your score with. An Experian credit score will have a maximum range of 999, TransUnion goes up to 710 and Equifax has a set limit of 700. All of the scales differ from each other as well. So with each of the CRAs, your credit score is more than likely to be different, but as long as you keep your information accurate and up to date, it shouldn’t have any impact when you apply for loans or credit cards.

Electoral roll and your credit rating

Credit CArd

It is a legal requirement to register on the electoral roll even if you don’t use it to vote. Getting onto the register also has other benefits, which include personal identity protection and potentially increased chances of receiving credit from lenders.

A credit report and score will reflect the chance you have of being approved by lenders for things such as personal loans and credit cards. When you register for the electoral roll, the details are added to your credit report. Having this data present as part of the report can confirm your current name and address to your potential lenders. As a result of this, your score can increase. It’s essential that a lender can identify that you are registered in England or the UK as a resident to stop problems such as identity theft and fraud. Checking that you are authorised and regulated to vote in the UK could potentially be one of the easiest ways to improve your credit score.

Credit score ranges

There is no such thing as a universal scale for credit scores. All three of the CRAs use different models to calculate your score, so the range is different for each one.

Ranges with TransUnion

TransUnion organises their credit scores using a rating system between one and five. One is the worst it could be, while five is the best. Below is how each score pairs up with their ratings.

  • Credit score 0-550: Very Poor: Rating 1
  • Credit score 551-565: Poor: Rating 2
  • Credit score 566-603: Fair: Rating 3
  • Credit score 604-627: Good: Rating 4
  • Credit score 628-710: Excellent: Rating 5

Ranges with Experian

Experian calculates their scores out of 999. By their definition, a good rating is anything above 881. See the rest of their classification ranges below.

  • Credit score 0-560: Very Poor
  • Credit score 561-720: Poor
  • Credit score 721-880: Fair
  • Credit score 881-960: Good
  • Credit score 961-999: Excellent

Ranges with Equifax

Different again to the two other CRAs, Equifax rate their scores out of 700. Their definition of a good rating will be anything at 420 or above.

  • Credit score 0-279: Very Poor
  • Credit score 280-379: Poor
  • Credit score 380-419: Fair
  • Credit score 420-465: Good
  • Credit score 466-700: Excellent

Statutory report

Before you apply for any credit cards or loans, it may be a good idea to check your credit report first. This is because credit checks can show on your credit report and negatively affect your rating if you choose to apply to multiple lenders at the same time.

Each CRA has to provide you with a statutory credit report. You can access this online or receive a paper copy for a fee of £2. In this report, you will be given a snapshot of your current credit status and information about your credit history too. The main features of a statutory report include your details, whether you are registered on the electoral roll, your current credit accounts, missed payments or defaults, and any credit checks that have occurred in the last two years.

You have a legal right to request the statutory report under the Consumer Credit Act 1974. All three of the credit reference agencies will charge you £2 for each report you have requested. The fee is there to cover any admin costs the agency may have. As well as applying online, you can also apply in writing to the registered office address of the CRA to receive a paper report. Each CRA holds different information about you, so it may be worth requesting a report from each one.

Credit checks

Credit File

A credit check or credit search is when a lender looks at the information included in your credit report to better understand your financial history. No consent has to be given to check credit, but they must have a legitimate reason to do so, such as applying to receive a loan from them.

During a credit check, lenders could look at how you manage your current debts. Information like if you have made your credit card repayments on time or how many loans and credit cards you currently have will usually be checked. It’s important to know that checking your own credit won’t have any impact on your score, and you can check it as many times as you want to.

For credit checks, two types are used by lenders – a soft check and a hard check.

Soft credit checks

When a lender carries out a soft search on your credit, they are taking the first look through the information contained in your credit report. A company may perform a soft search to decide if your application could be successful without having to conduct a full examination of your financial history.

The crucial thing to know about soft checks is that they do not appear on your credit report, so they won’t be visible to other lending companies. They also shouldn’t have any impact on your credit score, nor your ability to apply for credit in the future. Only you will be able to view them as part of your report, and it shouldn’t matter how many of them there are on the list.

Soft searches on your credit are beneficial for anyone who wants to see their eligibility for credit cards, loans, and other borrowing methods. They won’t leave a trace on your credit history, and there isn’t a set limit of how many checks you can carry out, even if they are grouped closely together.

Hard credit checks

A hard search is done on your credit when a company is considering your application for cards, loans, or any other kind of credit. During the search, your entire credit report is checked. Other companies that are performing checks on your credit will also be able to see these hard searches.

Having too many hard searches on your credit within a short space of time can have a negative impact on your credit score. If they do appear in your report, they will typically stay there for six months. When a hard search affects your credit score in this way, you may have a reduced chance of being approved for credit cards and loans for those six months.

Any lender that you apply to receive credit from has the authority to conduct a hard search on your credit report to ascertain how suitable you are to loan money to. There are other companies such as mobile phone networks and utility providers who conduct hard searches on your credit when you apply to use their services as well.

If you apply for multiple credit cards, loans, or other financial means of borrowing, the hard searches will appear on your overall credit report. Having numerous hard searches placed closely together can have a more significant effect on your credit score. It will more than likely hinder your ability to get credit in the near future.

Credit rating FAQs

How can I check my credit rating?

You can check your credit rating by requesting a credit report from one of the three credit reference agencies. You can do this online or in writing to their registered office address. All credit ratings that are part of a statutory credit report will be given for a small fee of £2 from each of the main CRAs.

Is a credit score of 500 good?

Any credit score that falls between 300 and 579 is considered very poor. 500 is seen as below average for an Experian credit score, and lenders may not choose to lend to someone who falls within the very poor range.

Is a credit score of 650 good or bad?

A credit score that is at 650 or over is considered to be fair or good. However, where you fall within that range will all depend on the credit reference agency you are using.

How to improve your credit score

There are a few tips you can use to improve your score if you want to have more successful credit applications. To improve your credit rating, you could:

  • Register on the electoral roll to prove where you live
  • Build up a good credit history
  • Make payments on time and maintain reliability
  • Don’t overborrow and keep credit utilisation at a low

What is a good credit score?

There isn’t an overall magic number that determines a good credit score. Lenders all look for something different in people that apply for loans or a credit card with them. Typically, a good credit score should fall between 881 and 960 on the scale of 0-999. Fair or average scores fall between 721 and 880.

Conclusion

Once you have your credit score, you want to keep it as healthy as possible. Closing unused accounts, keeping up with your repayments, and limiting the number of credit applications you are making can all help build a good credit score. If you are unsure about what your credit score means and how you can improve it, get in touch with a service that is authorised and regulated by the Financial Conduct Authority to give you advice on the subject.

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