A credit score is a rating that indicates how profitable and appealing a person is to a lender. Lenders and credit brokers use credit scores to assess customers. Credit scores are all about trying to predict customers’ future spending behaviours based on the way they have conducted their finances in the past. If you’re trying to improve your credit score, or want some advice on your finances, Financial Advisor UK can match you with a financial professional from a national network of fully FCA-registered and approved advisors, ensuring you receive the best professional advice along with the best deals available.

To assess credit scores, lenders compare data from transactions and loan applications that a customer has previously made. This will enable the lender to determine what the customer owes, the credit products they have purchased in the past, and whether they are reliable in making payments on time. A lender will also look at a customer’s credit file and any previous dealings they have had with them to estimate how profitable they are as a customer, and their level of risk.

There are many falsehoods surrounding credit scores, which mainly stem from conflicting information from lenders and general misunderstanding. Credit reference agencies generally don’t want customers to understand how their credit score system works, so that they can continue to sell products to customers based on a lack of comprehension. For example, it is believed that there is a credit score ‘blacklist’ of people to whom credit companies will never sell products. This is completely false, as each lender assesses a customer differently. Credit checks are based on complicated algorithms which can vary based on the lender’s system.

If you are rejected for a loan or credit card by one lender, that doesn’t mean that you won’t be able to obtain a product elsewhere with a different lender. It’s important to remember that even if you have a poor credit score or a bad credit history, you won’t be ‘blacklisted’ by companies, even if it may feel that way. There are companies that offer products and services to those with a poor credit history, although rates are much higher because of the heightened level of risk.

Why should I try and improve my credit score?

When you apply for a loan or some form of credit, a credit broker or lender will need to assess your credit score to determine the level of risk in lending money to you. A lender will make the valuation based on your credit report, details you have placed in your loan application, and any data that they may already have on file about your spending behaviour or credit history. If you are trying to improve your credit score, it will take time (up to three months).

The higher the number you have as your credit score, the lower risk you are to a lender, as a high number means that you have managed money responsibly in the past and have made payments on time when you have taken out a loan. This means that you are more likely to be approved for a loan or credit product.

Improving your credit score can help you in many ways financially-speaking. You can benefit from higher credit limits, more options from credit brokers, larger amounts of money (that you can borrow), and more affordable interest rates, which can help make borrowing easier. These benefits are great for helping you to achieve long-term financial goals, such as purchasing a home, having an extension or building works completed on your current home, buying a car, or having a a dream holiday. Use our service to get matched with a financial professional from Financial Advisor UK’s national network of fully FCA-registered and approved advisors.

What makes a good credit score?

Keep in mind that different lenders have different criteria for what makes a ‘good’ credit score. Generally speaking however, the below credit report agencies state the following to be good credit scores:

Experian: Scoring over 880 (out of 999 in total)

Equifax: Scoring over 420 (out of 700 in total)

Having a good credit score isn’t always a guarantee that a lender will view your application favourably. You could be declined based on your previous behaviours, defaulted accounts, debts etc.

How can I improve my credit score?

There are several things you can do to improve your credit score. The most important is to have a credit history. Having no credit history (for example, no credit cards), can make it harder for credit companies to find information on you. As a result, your credit score may be automatically lowered to cover the lender’s risk. This is especially common with younger people, or those who have just emigrated to the UK.

It is also worth being on the electoral roll, as this can help improve your score as you can prove where you live, regardless of your living circumstances.

Always be on time in making repayments, as this will prove that you are a responsible and reliable borrower. Make sure your accounts are well managed, and that your payment history is consistent. If you have accounts that are old or are not well-managed, or have unused credit cards, this could have an impact on your credit score. Close down any accounts or cards that you are not using, and avoid defaulted or delinquent accounts. County Court Judgements forcing you to pay debts can also greatly damage your credit rating. Bankruptcy can stay on your files for over six years, and it can be a difficult and long time before you can recover a credit score from here.

You should also keep what is known as your ‘credit utilisation’ to a low amount. This is the percentage of your overall credit limit that you can use. For example, if your credit limit is £5,000 and you have used £2,500, you have used half of your limit, so your utilisation is 50%. If you only borrowed £500, you will have only borrowed 10%, therefore your utilisation will be lower. Creditors like customers that have a lower credit utilisation, and tend to give them better credit scores.

Finally, try not to apply for credit too often or in quick succession. If you approach many lenders within a short space of time, your credit history may become affected as lenders may feel that you are relying on loans to get by, making you a higher level of risk. Space out credit card and loan applications as much as possible – leaving at least four months in between each application.