Credit scoring is tricky to understand at the best of times. Here, we explain how your credit score is calculated and what kind of things tend to affect it.
What is a credit score?
A credit score is a 3-digit number that shows you how likely you are to be accepted for credit. It’s based on your credit report, which is a record of how you’ve handled credit in the past.
When you’re thinking about how lenders view you, remember that they're looking for someone who will be able to meet the repayments: they want someone who is low risk.
A higher credit score means your credit report contains information that shows you’re low risk - so you’re more likely to appeal to lenders. For example, your report shows that you always pay your bills on time. A higher credit score means your application for credit is more likely to be accepted, and you’re also more likely to be offered cheaper rates of interest.
If you have a lower credit score, you might be seen as a high risk. For example, your credit report shows that you’ve defaulted on a previous debt or have a CCJ against you. This means lenders might offer you credit at a higher rate of interest or reject your credit application altogether.
Who calculates your credit score?
Your credit score is calculated by a credit reference agency (CRA). There are 3 CRAs in the UK – Experian, Equifax and Call Credit. ClearScore is not a credit reference agency. We show you your Equifax credit score, which ranges from 0 to 700.
Each CRA is sent information by lenders about the credit you have and how you manage it. Other information, such as public records like the electoral roll, are also sent to the CRAs and form part of your credit report. Once a CRA has enough information on you, they will generate your credit report and calculate your credit score.
How is your credit score calculated?
It may have dawned on you (if you’ve already checked your score) that it’s not always obvious what’s affecting your credit score. This is because of the way it is calculated.
When a credit reference agency calculates your score, they will take into account all of the information in your report and assess your overall level of risk. This means individual factors may not have a direct impact on it, because it will depend on what else is going on in your report. (This is why we can’t tell you how many points you’ll lose for certain credit behaviours – because it will be different for everyone).
For example, if you miss a payment but have a good credit history, it’s not as likely to lower your score, as if you have a history of managing your debt poorly.
On top of this, different factors will have a different level of impact on your score, depending on how they’re viewed by lenders and what else is going on in your report. For example, if you default on a debt it’s likely to be much more serious in the eyes of a lender than missing a payment. And even more so if you’ve got a poor credit history.
Having no previous credit history makes it hard to get a credit score
Credit scoring is about predicting if you’re likely to pay back credit based on how you’ve handled it in the past. So, if you have never borrowed money before or only borrowed a little, it will make it more difficult for lenders to judge whether you will be a high or low risk person to lend to. So, as a default, they’re likely to assume you are a high risk. This might mean you’re only offered credit at a higher rate of interested, or not accepted for credit at all.
You can read more in our article about ‘thin file’.
What kinds of factors could harm your credit score?
There are a number of factors that can affect your credit score – we’ve got a whole article about these factors here. At a glance, here are the main factors that could harm your credit score:
- If you already have a large amount of credit available to use (e.g. having lots of credit cards)
This may make lenders think that if you get into financial trouble, you’ll be less likely to pay them back. It also means that you have the potential to run up very high debts.
- If you’re currently using a large amount (over 50%) of your total credit limit
This could make it look like you’re struggling with cash-flow or not managing your debt well, even if you repay in full at the end of the month.
- If you make several applications for credit in a short period of time
Each time you apply for credit a ‘hard search’ is carried out on your credit report and a mark is left by the lender – even if your application is rejected. If you have a lot of ‘hard searches’ appear on your report in a short period of time, it may make you seem desperate for credit to other lenders. They might assume you’re going through financial difficulties and therefore you may appear high risk. These searches stay on your report for 12 months.
- Frequent change of address
This may take away from your image of stability and make you appear more high risk to lenders.
- Mistakes on your report
This might mean your report won’t be a true reflection of how you manage credit. For example, if you have the wrong name or address listed on your report, your credit accounts might not all appear. If there are closed accounts showing as open, it could suggest you have more credit available than you actually do.
- Public records and ‘non-credit’ based factors
Information such as how long you’ve lived at your address and if you’re on the electoral roll appear on you credit report. This is because lenders are keen to see stability in the people they lend to as they see it as a sign you’re more likely to repay your debt. If you’re not on the electoral roll, or you change address frequently, it could negatively affect your credit score.
The factors that have the biggest negative impact on your score are:
- Repeatedly missing or making late payments
- Defaults on debt
- County Court Judgments (CCJs)
These factors each show serious financial difficulty and suggest you cannot or could not afford the debt you have taken on. They usually stay on your report for around 6 years, so during that time lenders could be less willing to grant you credit.