How Does Credit Scoring Work?

We look at how credit scoring works.

Updated: June 5, 2024
Rebecca Goodman

Written By

Rebecca Goodman

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Your credit score is a record of how you manage your money and every time you apply for credit, it is used by lenders to calculate how much you can borrow and at what interest rate. 

Credit scoring is important because if you have a good credit score, you’ll be able to borrow larger amounts at cheaper rates but if you have a poor credit score, you’ll be restricted to expensive rates and smaller loans. 

Understanding how credit scoring works can give you the tools to boost your own rate, opening up more opportunities and products at cheaper rates. In this guide we look at how credit scoring works, how the credit reference agencies score people, what these figures mean, and how you can boost your own score.

What is credit scoring?

There are three main credit reference agencies in the UK: Experian, Equifax and TransUnion and each works slightly differently when it comes to credit scoring. 

These agencies create a credit score by looking at information held about people. This could include details from the electoral roll along with information held by companies including credit providers and utility companies. The agencies each have their own methodology when it comes to credit scoring and use different ranges of numbers. 

The number given to a person is called a credit score and it shows whether they are likely to pay back credit they have borrowed. Someone with a high credit score will be more likely to make repayments on time while someone with a low credit score will be less likely to pay back anything they borrow.

These numbers are not set in stone and credit scores change as a person’s circumstances do. Therefore, if you have a bad credit score, it’s possible to improve it and this will in turn boost your chances of borrowing in the future. 

How does a credit score affect your finances?

Credit scoring is important because whenever you apply for credit, be it a personal loan or a new car, for example, lenders will look at your credit score.

They will make a decision over how much to lend you, what interest rate to charge you, and whether to lend to you at all by looking at your credit score. If you have a poor credit score, you may not be able to borrow anything or you may be given a small amount at a higher interest rate. 

Most of the market-leading credit products, including credit cards, are also only available to those with a high credit score.

How many credit scores can you have?

People don’t have just one credit score as each credit reference agency will calculate a score for a person.

Lenders often have their own credit scoring systems in place which they use when deciding whether to lend to someone or not. This means one person could have multiple credit scores. 

There’s no one perfect score either, at Experian, for example, it gives people a score of between 0 and 999. A number between 881 and 960 is known as a ‘good; score, between 721 and 880 it’s ‘fair’ or ‘average’.  

It’s free to check your credit score with any of the main agencies and most offer a paid-for service to give you access to a full report, with more details of all your credit arrangements. If you’re a new customer, you can often benefit from accessing the full credit report package for free for the first 30 days, and then most are around £15 a month after this initial period.

What impacts your credit score?

A credit score can be made up of many different things, and each credit reference agency uses its own data to create one.

However, the following are generally all used when calculating a credit score:

  • Any type of debt outstanding.
  • Borrowing more than you can afford to repay.
  • Number of credit accounts open.
  • How much credit is being used by a borrower.
  • The electoral roll.
  • Any missed debt repayments.
  • Any previous debt problems, such as bankruptcy, county court judgments (CCJs), or credit defaults remain on a credit score for six years.
  • Having no history of credit can negatively affect your score.

How can you improve your credit score?

You won’t be able to improve your credit score overnight but it is possible over time.

Your score reflects how you manage credit and by regularly checking it, and making sure the details are correct, you can begin to improve your score. The following will also help to boost your credit score:

  • Join the electoral roll.
  • Don’t borrow more than you can afford.
  • Avoid making lots of credit applications in a short space of time, as it may suggest to a lender that you aren’t managing your finances.
  • Always make debt repayments on time, set up a direct debit to pay these so you never forget.
  • Check your credit score regularly, it should show you if any details are wrong — such as account names or addresses and it’ll also flag up any fraudulent applications of credit.

Several companies, including Experian, also offer extra services for those who want to boost their credit score. Experian Boost is a free service that can improve your credit score, if you agree to extra information, such as details of council tax payments and digital subscriptions, being shared with the agency. 

In summary

Credit scoring is a way of calculating the risk of lending money to someone. This could be a credit card or a mortgage, either way a lender will want to know your credit score before it agrees to give you any money. Having a good credit score is crucial to unlocking the best products on the market too, the cheapest rates and the products with the most benefits are only available to those with a high score.

Checking your credit score regularly is also key and if you spot anything that doesn’t look right, such as an account with the wrong details, get the problem sorted as leaving it could damage your credit score.

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