Before a bank 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 publicly available information about your finances.
Credit reference agencies compile information about your financial history and generate credit scores. Banks then use the information from these agencies when making a decision about whether to give you credit. They also use it when determining what amount you may be able to repay.
What impacts your credit score?
Your credit score is based on how well you manage your money. A history of missing or making late payments on an existing credit card or loan could negatively impact your credit score.
It's 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 this can also negatively impact your credit score.
Credit scores vs credit ratings
Credit scores and credit ratings are 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. There's no universal credit score or credit rating. Different lenders and credit reference agencies score people differently using different tools.
Your credit score is based on your credit report, which is 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 TransUnion, Equifax and Experian. They don't make lending decisions and lenders don't tell them how the information they provided has affected a decision.
Since lenders and reporting agencies score differently, a report won't necessarily tell you whether you'll succeed in a credit application. But it can be a good idea to check to make sure there are no mistakes.
Why is it important to have a good credit score?
Your credit score can determine whether you get a loan or credit card and 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 offered a higher interest rate. Your credit score can also affect other types of credit agreements, such as mobile phone plans.
Building a good credit score
If you want to improve your credit score the best thing you can do is show good management of your money. This means making repayments on time and clearing any existing debts as soon as possible.