In the UK, there is no such thing as a universal ‘credit score’ or ‘credit rating’. Each lender will assess potential borrowers using their own criteria, which are trade secrets. You might look unattractive to one lender but be the right fit for another.
‘Credit scores’ are the result of marketing departments at credit agencies realising they could sell a subscription product to consumers, and are nothing more than a rough indication of your credit-worthiness.
Your credit rating only matters if you need more credit 💳
If you’re not applying for a credit card, personal loan, or bank account with an overdraft, your credit rating will have little to no impact on your life.
Even when you are, the numbered score you see doesn’t necessarily tell you whether you will be accepted. Lenders assess you with three key sources of info:
- Your application form which tells them your salary and current details.
- Any past dealings you’ve had with them. So a lender you’ve banked with has more info on you – sometimes good, sometimes not.
- Your credit files, which include electoral roll info, other credit products and balances you have, court judgements and more.
Each lender will use the information they have about you see if you meet its requirements as a profitable customer (this is known in the banking profession as a ‘balanced scorecard approach’). Those whose history shows they’re unlikely to repay at all are unlikely to be profitable, but low risk customers can be rejected too if the lender thinks you won’t make it money. See this Wikipedia article for more information.
Don’t stress about the exact numbers 😥
People sometimes worry that “my Equifax credit score has dropped”. Bear in mind that these numbers don’t indicate much in and of themselves. A few years ago the three major UK credit reference agencies (Experian, Equifax and Transunion) realised that they could sell consumers a ‘credit score’ service. Don’t be swayed by the expensive ad campaigns – these scores have little bearing on credit applications and are generally a waste of time.
Better indications are ‘soft search’ applications where you put in some details about yourself and a non-impacting search is made against your credit information, and shows you a percentage chance of getting certain cards.
What about mortgages? 🏡
Mortgage borrowing is assessed primarily on:
- Your gross income
- Your monthly affordability (including your fixed expenses e.g. car, childcare)
- Your loan-to-value ratio (the size of the loan compared to the value of the property)
You do not need a particular credit ‘score’ to get a mortgage, and you will not get a better interest rate or larger loan based on your score. However some red flags on your credit file will make it more difficult to get a mortgage, especially:
- CCJs, defaults or bankruptcy
- Payday loans
- Living in your overdraft
If you have these red flags you may find your choice of lenders is very limited, so you won’t be able to access the better deals than you see on comparison sites.
How to check your credit file 🗂
⚠️ Never pay for your credit reports!
You do not need to pay for any of the credit reference agencies’ expensive credit scoring products – you have a legal right to access your reports free-of-charge.
If you’ve paid for Experian’s “CreditExpert” service, you may have been mis-sold. See Money Saving Expert for further details.
Even small errors on your files at the three credit reference agencies – Experian, Equifax, and TransUnion (formerly Callcredit) – can cause problems with applications. Check them all line by line at least once a year, plus before any big application, focusing on the one that the lender you’re applying to uses.
Statutory reports 💼
Since the General Data Protection Regulation came into force in 2018, it’s now possible to request your entire credit report free-of-charge direct from the credit reference agencies. These reports will not typically include the agency’s credit score they’ve calculated for you – as discussed above, scores aren’t especially useful. The links below will take you direct to the relevant statutory report request form:
Free ‘Credit Checking Services’ 💸
All three CRAs now offer free credit checking services in addition to the legally required statutory reports. Please consider the phrase “if the product is free, you are the product”, and be aware that they may use your data to market to you, or sell to third parties. Check their privacy policies carefully!
How to improve your credit worthiness 🤝
Avoid red flags 🚩
- Never withdraw cash on credit cards. It’s expensive and is evidence of poor money management.
- Never miss repayments. Set up a direct debit to be sure that at least the necessary minimum repayments are taken automatically.
- Never take out payday loans. They’re dangerous in their own right, but some mortgage underwriters simply won’t lend to anyone who’s had one.
- Check for address errors. An old technically active but unused mobile phone contract registered to your old address could potentially cause a mortgage rejection due to “fraud prevention” systems.
Have (and use) some form of credit 📃
Credit scoring is all about trying to predict your future behaviour based on your past. So rejection is likely if your credit history makes you look a high risk borrower due to defaults, missed payments, or other problems. Similarly, a lack of credit history can be a problem, as lenders may struggle to evaluate the risk in lending to you. After all, would you lend to someone you knew nothing about?
The typical solution to bad or non-existent credit history is to get a credit card, do a small amount of your normal spending on it each month, being sure to stick within the credit limit, and to repay in full each month so that there’s no interest due. To do this, you should set up a direct debit to pay off the full amount automatically each month, to ensure you don’t miss a payment. After some time doing this, you will typically start to develop or improve your credit history, as this “good behaviour” feeds back to the credit reference agencies.
There are specific ‘credit-builder’ cards available for those with limited or poor credit history, but be warned – these tend to have extremely high interest rates, in the 40%+ per annum range, so it is incredibly important to repay any borrowing in full each month, before you are charged interest. You can set this up to happen automatically using a direct debit for the full (not minimum) statement amount.
Another possibility, if you’re struggling to find a lender who will offer you a credit card is to check with your existing bank. Sometimes a bank who you have had a sensibly managed account with for a while will be more willing to offer you a credit card as they can take into account the behaviour they can “see” from your current account. If you’re a student, then you may well find that your bank offers a student credit card, which can be a good way of building some credit history.
Get on the electoral roll 🗳️
If you’re not on the electoral roll, getting credit can be tough, as it causes ID and tracing issues, making it harder to verify your address. Don’t worry about getting lots of junk mail though – you can opt out of the ‘open register’ element, which stops this but still means you count for credit scoring purposes. You register online using the gov.uk register to vote service.
Avoid lots of applications in a short space of time 🐌
Almost every card or loan application leaves a footprint on your credit file. Too many of these, especially in a short space of time, can hurt future applications. This means the system is somewhat anti-shopping around, as if you get rejected or are offered a worse rate than advertised by a particular provider, you may have wanted to apply elsewhere.
Space out and prioritise applications – if you’re about to apply for a mortgage, don’t apply for minor things like cashback credit cards in the weeks beforehand.
Many comparison sites and lenders offer eligibility calculators that perform a ‘soft’ credit check (you see it on your file, but lenders don’t, so there’s no impact) which show an estimate of your chance of acceptance for different cards, so you can home in on the right card, minimising applications.
Wait for negative information to drop off ⏳
Major problems like CCJs, defaults or bankruptcy stay on your file for 6 years. Applications for products stay on for 1 year. So if they’ll soon lapse, it can be better to wait before applying.
Get unfair defaults removed from your file 🚫
If there’s a default on your file that isn’t fair (e.g. you didn’t pay off a catalogue loan as it failed to deliver the goods), it’s important to get it removed. Try to approach the lender that registered the information first, and if that fails all three credit agencies have “resolution” procedures.
Be careful with joint bank accounts and loans 👫
If you are financially linked to someone else, then their credit history can be looked at when assessing whether to lend to you. If theirs is bad, avoid any joint products.
It’s not whether you live together, are married, or hold hands that links your credit file to someone else’s. It’s simply whether you have a joint credit agreement (mortgages, loans, bank accounts and sometimes utility bills).
Be consistent, even on different applications, to avoid fraud scoring 📋
Fraud scoring is credit scoring’s secret cousin. Among other things, these specialist agencies map how consistent your applications are, even to totally different firms. So be consistent if you’ve a couple of mobiles or job titles – use exactly the same one every time you apply.