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What is a credit score and why does it matter?

Having a good credit score can give you the means to achieve your ambitions. Understand how credit scores work – and how you can keep yours healthy.

Assessing risk

Before a bank or a credit card company agrees to lend you money, they need to understand how likely you are to pay it back. To do this, they look at your borrowing history as well as other, publically available information about you. Credit reference agencies compile this information and generate credit scores. The bank or credit card company uses the information from these agencies when making a decision about whether to give you credit.

Credit scores vs credit ratings

Credit scores and credit ratings are both tools used by lenders to decide how creditworthy you are. Scores are numerical, while ratings show where you are on a scale or in a banding, but essentially they have the same purpose. There's no universal credit score or credit rating – different lenders and credit reference agencies score people differently using different tools.

Credit reports

Your credit score is based on your credit report, also called a credit file. This will have details of all your credit agreements such as loans and credit cards, including any you hold jointly with other people. It also includes information on payments you've missed over the last six years, and any County Court Judgments you might have against you. However, it doesn't include things such as your medical history or salary.

Who are the credit reference agencies?

The major UK agencies are Callcredit, Equifax and Experian. Credit reference agencies don't make lending decisions and lenders don't tell them how the information they have provided has affected a decision. You can see the credit scores and credit ratings that agencies have for you for free or for a small fee – but, since lenders score differently, they won't necessarily tell you whether you'll succeed in a loan credit application.

You can see the credit scores and credit ratings that agencies have for you for free or for a small fee

Why is it important to have a good credit score?

Your credit score affects not just whether you get a loan or credit card. It also impacts the amount of money and type of deal you might get. If you have a poor credit score, you may find you're only offered a higher interest rate on credit cards and loans. Your credit score will also affect other types of credit agreements, such as mobile phone plans.

What impacts your credit score?

Your credit score is based on how well you manage your money. If you have a history of missing payments on an existing card or loan, or making payments late, you could find so it will be affected by things like late or missed payments. It's also difficult for lenders to assess the risk of lending to someone who hasn't had much credit in the past – so if you haven't borrowed before it can affect your credit score.

Improving your credit score

It can be a good idea to check your credit reports to make sure there aren't any mistakes. Another thing you can do is make sure you're on the electoral roll. In the longer term, you may need to pay off any credit you already have before you apply for further credit.

Did you know...? It's easy to find out what's in your credit report – you have the right to see a copy of the report any credit reference agency holds on you for £2.
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