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Credit Score Guide – What You Need to Know

Credit Score Guide – What You Need to Know

Credit Score Guide: What You Need to Know 

A credit score is a three-digit number that helps lenders determine the creditworthiness of an individual. A high credit score indicates that the individual is financially responsible, making them a lower risk borrower, while a low credit score suggests a high risk of default. 

Lenders use credit scores to determine whether to approve credit applications, and at what interest rate. As such, maintaining a good credit score is essential for obtaining loans, credit cards, mortgages, and other financial products. In this blog, we will provide a comprehensive guide on everything you need to know about credit scores. 

What Is a Credit Score?

A credit score is a numerical representation of an individual’s creditworthiness. It is calculated based on the information in an individual’s credit report, which includes their credit history, debt-to-income ratio, and other financial information. 

What’s the Average Credit Score in the UK?

It’s difficult to give an average credit score for the UK as different credit reference agencies and lenders use different scoring systems and criteria. However, Experian, one of the largest credit reference agencies in the UK, provides a credit score range from 0-999, where a score of 961-999 is considered “Excellent”, 881-960 is “Good”, 721-880 is “Fair”, 561-720 is “Poor”, and 0-560 is “Very Poor”. 

According to Experian, the average credit score in the UK is around 682, which falls within the “Fair” range. However, it’s worth noting that credit scores can vary based on a range of factors, such as age, income, credit history, and the type of credit being applied for. 

What Is a Good Credit Score? 

A good credit score is generally considered to be 700 or higher. However, the definition of a good score can vary depending on the lender and the type of credit you are applying for. 

For example, a good score for a mortgage lender may be higher than a good score for a credit card issuer. Additionally, some lenders may have different criteria for approving borrowers with bad credit scores. 

a woman on her laptop looking at her credit score.

What Affects/Impacts Your Credit Score? 

Several factors affect your credit score, but, we’d say the following five areas are the main factors that impact your credit score: 

  1. Payment History: Your payment history is the most significant factor that affects your credit score. Late or missed payments can significantly lower your credit score, while a history of on-time payments can improve it. 
  2. Credit Utilisation: Credit utilisation is the amount of credit used compared to the total credit available. High credit utilisation could lower your credit score, while having a lower credit utilisation can improve your credit score. 
  3. Length of Credit History: The length of credit history is the amount of time you’ve had your credit accounts open. A longer credit history will naturally improve your credit score, while a short credit history normally means a lower credit score. 
  4. Types of Credit: The types of credit you can have can impact credit scores. Having too much in one area can be deemed as negative activity. It’s best practice to aim for a mix of credit types, such as credit cards, car loans, and mortgages, which can improve your credit score. 
  5. New Credit: Applying for new credit can temporarily lower your credit score, as it suggests an increased risk of borrowing. 

What Are the 4 Credit Reference Agencies in the UK?

Most people assume there are 4 main credit reference agencies in the UK. However, there are actually only three credit reference agencies in the UK. They are: 

  1. Equifax: Equifax is one of the largest credit reference agencies in the UK, and provides credit reports and scores for individuals and businesses. They also offer a range of other credit-related services. 
  2. Experian: Experian is another major credit reference agency in the UK, they provide credit scores and reports, as well as fraud prevention and identity verification services. 
  3. TransUnion: TransUnion (formerly Callcredit) is the third major credit reference agency in the UK, and provides credit reports, scores and a range of other credit-related services. 

It’s worth noting that there are other companies that offer credit-related services in the UK, such as ClearScore and Credit Karma, but they do not technically qualify as credit reference agencies as they do not hold credit data themselves. Instead, they use data from one or more of the three main credit reference agencies to provide their services. 

How to Check Your Credit Score? 

Individuals can check their credit scores for free once a year from each of the three major credit reference agencies in the UK: Equifax, Experian and TransUnion. Additionally, many credit card issuers and other financial institutions offer free credit score monitoring services. These services allow individuals to check their credit scores regularly and receive alerts when there are changes to their credit reports. 

It is essential to check your credit score regularly to monitor for errors or fraudulent activity on your credit report. Errors on credit reports can significantly lower your credit score, while fraudulent activity can damage your credit and financial health. 

Can Short Term Loans Affect Credit Scores? 

Yes, short term loans can have an effect on your credit score. When you take out a short-term loan, such as a payday loan the lender will most probably report the loan to the credit reference agencies. The way you manage the loan can then affect your credit score in a number of ways, such as your credit mix and how many credit inquiries you make. 

In summary, taking out a short-term loan can have an impact on your credit score, both positively and negatively. It is important to carefully consider the terms of the loan, make timely payments, and manage your credit utilisation carefully to minimize any negative impact on your credit score. 

How Does a CCJ affect a Credit Score? 

A CCJ (County Court Judgement) can have a significant negative affect on your credit score. A CCJ is a court order that can be issued against you if you fail to repay a debt that you owe. Once a CCJ is issued, it will appear on your credit report for six years from the date of issue, regardless of whether you have paid the debt in full or not. 

The presence of a CCJ on your credit report can make it more difficult to gain credit in the future. Lenders may view you as ‘higher risk’ and may be less likely to approve the applications you make for most lines of credit. If you are approved, you may be offered less favorable terms, such as higher interest rates or lower credit limits.

In addition to the negative impact on your credit score, a CCJ can also have other consequences, such as difficulty with renting and finding employment. 

a lady checking her latest credit report on her mobile.

Can Payday Loans Improve Your Credit? 

Payday loans are generally not designed to improve your credit score, and using them as a way to try to improve your credit can be risky and expensive. In fact, if you do not manage the payday loan properly, it can harm your credit score. 

However, if you take out a payday loan and pay it back on time, it could potentially help improve your credit score indirectly. Paying back any loan on time can help establish a good payment history, which is an important factor in determining your credit score. Additionally, if you have a high credit utilisation rate, taking out a payday loan and paying it off can help improve your credit utilisation ratio, which is also a factor that affects your credit score. 

Will Payday Loans Affect Getting a Mortgage?  

Yes, having a history of taking out payday loans can potentially affect your ability to get a mortgage. When applying for a mortgage, lenders will review your credit history and credit score to assess your creditworthiness and ability to make mortgage payments. If they see that you have a history of taking out payday loans, it can indicate to them that you have had financial difficulties in the past, which may make them hesitant to lend to you.  

If you have taken out multiple payday loans in a short period of time, this can raise red flags with mortgage lenders. It can suggest that you are struggling to manage your finances and may be at risk of defaulting on your mortgage payments.  

Overall, having a history of taking out payday loans can impact your ability to get a mortgage, as it can suggest to lenders that you are a higher risk borrower. If you are considering taking out a payday loan, it’s important to carefully consider the potential impact it may have on your credit history and ability to obtain credit in the future.  

A Conclusion on Your Credit Score Guide: 

Your credit score is an important tool that can impact your financial future. By understanding what it is, how it is calculated, and what you can do to improve it, you can take control of your credit and improve your financial health.

In conclusion, the best advice we can give is to make payments on time, clear the debt you owe, check your credit reports regularly, keep old accounts open, and avoid opening too many new accounts. With these tips, you can improve your credit score and work towards being able to get access to better lending options. 

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