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What is a credit score?

A credit score is a three-digit number which helps lenders decide whether to give you credit. One way of thinking about it is to see it as a measure of risk to the lender.

A credit score is a three-digit number calculated using your credit report, which helps lenders decide whether to give you credit. One way of thinking about it is to see it as a measure of risk to the lender. The higher the score, the better you managed your debt in the past, which makes it more likely that you will be considered low risk and therefore given a form of credit.

ClearScore shows you your Equifax credit score. The score ranges from 0 to 700. A higher score means that your application is more likely to be accepted. However, it also means that you are likely to be eligible for better interest rates and better deals when borrowing money or taking out a mortgage.

The score is useful because it gives you an idea of how the lenders view you. Most importantly, it allows you to keep an eye on the changes in your score, which reflect the changes in your report. For example, missing a payment will lower your score but paying off a loan might affect it positively.

Your credit score now

Your score today is a snapshot reflecting how you handled debt and credit accounts in the past. For example if you handled debt well, never defaulting or missing payments, your score will be good. However, if you’ve had trouble paying off your debts, your score will be lower.

Though it might seem counter-intuitive, having no previous credit history will affect your score unfavourably. Credit scoring is about predicting your future behaviour based on how you have managed your debt in the past. So, no history, or a ‘thin file’, containing very little financial history, will make it more difficult to judge whether you will be a good customer.

If you are planning on borrowing in one way or another, for example by getting a mortgage, you will want to prove to the lender that you are a risk worth taking.

Even if you’re not planning on borrowing money right now, you might want to or need to in the future. Your credit history is something that you build over time so thinking about it now will make it easier to make the changes. Small changes will get you much further over a long period of time
than a big effort closer to the time when you need to borrow money.

Factors that affect your score

When thinking about how lenders view your report, remember that they are looking for someone who will be able to meet the repayments: they want someone who is low risk.

The main main factors that affect your score negatively:

  • A large amount of credit available (e.g. having lots of credit cards)
  • High credit utilisation
  • A large number of applications for credit in a short period of time
  • Frequent change of address
  • Mistakes on your report
  • A financial association with someone with poor credit
  • Late/missed payments, defaults
  • County Court Judgements
  • Bankruptcy

A large amount of credit available tells the lenders that if you get into financial trouble, you may be less likely to pay them back. Your repayments will be spread over a larger number of lenders. It also means that you have the potential to run up very high debts.

High credit utilisation makes it seem as if you are struggling with cash-flow or not managing your debt well, even if you repay in full at the end of the month.

Each time you apply for credit the lender carries out a check on your report. Most lenders do a ‘hard search’, which means that it shows up on your report, regardless of whether you were accepted or rejected. If you accumulate a lot of these searches 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 changes of address simply take away from your image of stability and therefore make you appear more high risk.

Any mistakes on your report can have an effect on your score. These can be factual errors, such as the wrong address listed under one of your accounts, or closed accounts showing as open. It could even be that an unknown account is linked to your record as a result of fraudulent activity. Picking up any mistakes is crucial.

A financial association occurs when you have a joint credit account or have made a joint credit application with another person. This is sometimes called a financial connection. If you are financially connected to someone, their information may affect a lending decision about you. If you are still financially linked to an ex-partner when in reality that connection does not exist anymore, you should make sure you should make sure that the associations are removed.

The factors that have the biggest negative impact on your score are:

  • Late or missed payments
  • Defaults on debt
  • County Court Judgments (CCJs)
  • Bankruptcy

These show serious financial difficulty and suggest you cannot or could not afford the debt you have taken on. Though you might be in the clear now, the items on your report stay there for 6 years and during that time lenders will be less willing to grant you credit.

Why do I have more than one score?

None of us have just one credit score. This is in part because there are three different credit scoring agencies and each one of them might have slightly different information about you. Each lender puts different value to the various aspects of your credit report, which also alters the score. However, scores from different agencies don’t tend to vary significantly.

In a nutshell:

  • A credit score is a three-digit number calculated based on your credit report
  • A higher score means you’re more likely to be accepted for credit
  • ClearScore shows you your Equifax credit score, which is out of 700
  • Having no credit history can affect your score negatively, as you don’t have any evidence that you’re a reliable borrower
  • The factors that have the biggest negative impact on your score are late or missed payments, defaults, County Court Judgments (CCJs) and bankruptcy
  • Everyone has three different credit scores, from the three major credit reference agencies in the UK

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