What is a credit score?

Your credit score is a crucial part of your financial life. It impacts your ability to access many financial services that millions of people in the UK rely on every day. A good credit score can help you save money and take advantage of financial opportunities, so it’s essential to understand exactly what it is.

A credit score is a measure of creditworthiness. Creditworthiness shows lenders how reliable you are as a borrower. There are a few factors that make up your credit score:

1. Credit history - is a record of your credit use, including how efficiently you pay it back. Your credit history is accumulated over a long period of time, so if you’ve previously missed a payment, it’ll, unfortunately, be reflected in your credit score.
2. Credit rating – this is a system that allows businesses to consider your credit history when deciding whether to lend to you. This is how they judge your creditworthiness. A credit rating is generated as a series of letters or numbers. Each lender has their own unique way of measuring a consumer’s credit rating, so the public doesn’t typically have access to this information.
3. Surprisingly, information such as address history, people with whom you share joint accounts and even whether you’re registered to vote are all factors in assessing your credit score.

Why does my credit score matter?

Lenders use Credit Rating Agencies that are very thorough in determining a credit score, but you might still ask why a credit score is important?

In certain circumstances, such as when buying a house, the only option for most people is to turn to a bank or lender for help with a loan or mortgage. The financial institution will check whether you’re a safe bet to repay them – your credit score indicates this. 

You’ll likely be granted the credit if your credit score is excellent. On the other hand, if your score is poor, the bank might use this as grounds to deny the credit, as unfair as this may feel. One in five people in the UK (20% of the population) have a poor credit score, so if this is you, you’re not alone in facing this issue.

Perhaps you have little evidence of your previous credit use. This could also mean you are denied access, as credit providers often rely on such information to assess your creditworthiness.

Some providers of financial services that have been established for many years use very traditional ways of assessing creditworthiness. You might have heard of Open Banking, which is a way for new providers of financial services to access information from your bank. This information can often provide extra insights into your financial situation and assure service providers that you are creditworthy rather than just relying on traditional ways of checking your credit history. 

In some cases, insurance companies may consider your credit score when determining premiums for home, auto or other types of insurance. They view a higher credit score as an indication of responsibility and are more likely to offer lower insurance premiums to individuals with good credit. 

Similarly, property management companies may check your credit score when you apply for a rental property. A good credit score can increase your chances of getting approved for the lease and could even result in lower rental fees. 

It’s also important to keep an eye on your credit score for the purpose of saving money. Having an improved credit score can save you thousands of pounds on rates for mortgages, loans, and credit cards.

According to research conducted by Moneycomms, competitive loan rates for borrowing £5,000 were around 4% mark at the time of the survey. But with a poor credit score, this could rise to a huge APR of 60%.

It’s useful to have a general idea of your credit score before you apply for a credit card. That way, you’ll have a good idea of how the lender will view you and the likelihood of acceptance. So how do you find out this information?

There are three main credit referenced agencies in the UK: Experian, Equifax, and TransUnion. Each agency has their own scoring system, so each agency will return a different credit score. They’ll also issue you an annual credit report. The following companies offer free credit score checking services: ClearScore (using Equifax data), Credit Club (using Experian) and Totally Money (using TransUnion). 

With that said, the result returned by these companies is purely for the purpose of giving the public a general idea of their creditworthiness. This is not the actual data that lenders use to assess reliability.

Your credit score is an important aspect of your financial identity but Wealth Advisor found that approximately 49% of the UK public have never checked their credit score.

It is recommended that you check your credit score at least once a year. That way you can be confident when applying for financial services, or plan ahead to improve it.