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By Ronica Ruparelia

Credit scores explained

5 min
Young male student sitting at table in café with a laptop and mug smiling

I’ve been working in the field for The Next Step for four years now. As part of my role, I’ve spent a lot of time with medical and dental students, offering them financial education in the areas that matter most to them.

Recently, I’ve noticed more and more students are asking me about credit scores. Some have heard of them, but don’t really know what they are. Others have some knowledge, but don’t understand how they work, how to utilise them and what can go wrong.

In this article, I’ll take you through what a credit score is and how it could affect you.

What is a credit score?

To put it very simply, a credit score is a three-digit number that rates your credit ‘worthiness’. You are considered to be more reliable at borrowing and repaying money if your number is high.

Your credit score rating could range from ‘very poor’ to ‘excellent’ and, although different websites have slightly different scoring models, the numbers should be fairly similar to the following:

  • 300-579: Poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very Good
  • 800-850: Excellent

How is it used?

Everyone’s credit score is individual to them, and it is this score that banks (and other lenders) use to assess your ability to repay any loans you may ask for. Scores are based on how much you have borrowed in the past, how well you have repaid debt and other information like your job and age.

A credit reference agency compiles this information to calculate your credit score for anyone making the decision to loan you money. It is important to recognise that different companies use different tools, which may mean they come up with slightly different scores.

It is not just lenders who use credit scores. People like landlords and prospective employers can use credit agencies to check your credit worthiness and identity too.

Checking your credit score will give you an idea of your credit worthiness.

Who are the different credit reference agencies?

There are three main credit reference agencies in the UK. These are Equifax, Experian and TransUnion.

As mentioned, these agencies provide your credit report to prospective lenders, landlords and employers, upon request, to help them verify your identity and determine how reliable you are at borrowing and repaying money.

Each credit reference agency is a separate organisation. This means they record and update information independently from one another. On top of this, each agency has its own unique scoring system, so your credit score could fluctuate slightly depending on which agency has provided your report.

As these agencies work independently, it has been known for the data held to differ from company to company, sometimes with negative effects.

I experienced this myself when I discovered mine and my siblings’ details had been merged by one agency, but not the others. Three out of the four agencies listed gave me an excellent score, but because one had the incorrect information, it rated me as poor, which obviously affects my ability to borrow.

Thankfully, because I’d checked my score with all four agencies, I spotted the issue and could rectify it. Most people are not aware of an issue until they are declined credit. However, it’s important to note that the majority of people find that they fall into the same category across all the agencies.

Why are credit scores important?

If you apply to borrow money, the lender will ask your permission to look at your credit score before proceeding with your application. Once you agree, the lender will look at this score and decide whether to accept your application and decide how much to offer you.

A good score can help you get approval for credit cards, loans and mortgages. This is why the score is important.

How are credit scores calculated?

Credit scores are calculated using a points system based on the information in your credit report. A high score could mean you have managed previous debts and bills well in the past. A low score could be due to a history of overdue payments.

If you have never borrowed money before, it is difficult for lenders to assess the risk of lending to you and your credit score will reflect that. So, even though it may seem like not borrowing money means you’re managing your money effectively, if you have no history of your ability to repay debt, this can work against you.

What can go wrong?

As I’ve mentioned, my credit score varied between the credit reference agencies because of a data error. If I’d not spotted and rectified this, it could have resulted in me being declined for any future borrowing I applied for. This has been known to happen with twins, where individual details are mixed.

You may have also heard of people being unable to borrow money because of a bad debt they did not know existed or thought had been rectified. Even if the value of the debt is low, the outcome is the same. So, the value doesn’t matter. It’s the demonstration of your ability to manage your money effectively and make repayments on time that’s considered.

Will checking credit hurt your credit score?

Great news, the answer is no! Checking your credit score is considered a soft check (vs. a hard check) and will not affect your score. Scores and reports also update monthly, so you can check it as many times as you like. In fact, it’s a good way to ensure your personal information is correct.

What should you do next?

Check your credit score at all four credit agencies. A lot of agencies use computer programmes to gather data, and this can sometimes lead to mistakes, like mine, so it’s certainly worth checking your details are correct at the same time.

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