Credit Building

What is a credit score? How is it calculated and what affects it?

Jul 21, 2022

If you’re new to the game, credit scores can seem like a minefield. You only have to take a quick peek at social media to see how much confusion and conflicting information there is out there.

Don’t worry though — grab a cuppa and settle down to read this page to get to the bottom of ‘what a credit score is’, ‘how it’s calculated’ and ‘what factors affect your credit score’. Loqbox is here to help you understand it clearly and give you everything you need to practically manage your score.

What is a credit score?

The first thing to know is…it’s a plural.

In the UK, there are three main credit reference agencies (CRAs for short) — Experian, Equifax and TransUnion.

Each of these agencies has huge amounts of data about how the public uses credit. Which they helpfully keep in individual ‘credit files’.

As they are business competitors, they work independently from each other. And because each agency has its own system for creating credit scores, you actually have three credit scores. Not just one!

Credit scores are for your benefit, not the lender.

Your credit score is a number for you — a member of the public. It’s a number generated on a scale of ‘poor’ to ‘excellent’, and it’s designed to help you understand how a lender may view you. This can help you make decisions on when the best time might be to apply for credit based on your likelihood of your application being accepted.

It’s deliberately simplistic. And so it’s healthy to remember this score, like others, is just a number, and not indicative of your self-worth — we know you are so much more than your credit score!

It is not what the lender uses!

Before deciding to lend to you, the lender will want to see some good evidence of your credit history (how much you’ve borrowed on credit in the past and how well you repaid it).

They’ll have their own algorithm to figure this out based on your ‘credit file’ information that the CRA gives them.

So essentially, a long history of good credit use is what will help improve your credit score and your chances of being approved for loans, mortgages, credit cards, etc. Lenders like to see that you are reliable with credit and always make payments on time, and in full.

How is a credit score calculated?

The companies that you use — like banks, phone contract providers, credit card companies, personal loan issuers, car insurers, utility suppliers, and so on — are regularly reporting to Experian, Equifax and TransUnion.

This reporting is what builds up the bulk of data that the CRAs have about members of the public.

Credit scores are calculated by the data in your credit file (including things like your address history and financial connections you may have) — plus how Experian, Equifax and TransUnion each decide what their scores are from ‘poor’ to ‘excellent’.

Different information may be shared with different agencies. So your phone bill information may be reported to TransUnion, but not Equifax. And your water supplier may only report to Experian. These three companies have their own rating systems (read more about that here). This is why you’ll have three different credit scores, depending on which of the three agencies’ credit reports you’re looking at.

And because the next time you apply for credit you don’t know which CRA a lender will use to check you’ll be likely to pay back the credit, it’s important to make sure each of your credit reports is in tip-top shape.

For instance, if you were to buy a laptop on credit with the expectation that you pay it back over monthly instalments, you likely won’t know ahead of time which of the CRAs the laptop seller will use to check how well you’ve handled credit in the past.

And remember — you can check your credit score for free, without causing any harm to your score, by using the following services:

ClearScore (uses Equifax data)*

Credit Club (uses Experian data)

Intuit Credit Karma (uses TransUnion data)

*For transparency: If you decide to sign up to ClearScore using the link above, we’ll receive a small commission.

What affects my credit score?

There are many factors that could affect your credit score, both positively and negatively. Here are the seven factors that affect your credit score to be mindful of, and what actions you can take to keep yours in control:

1. Your address history.

Why is it important:
Your address history should be perfect and identical across Experian, Equifax and TransUnion. It’s as fussy as if you lived at ‘Apartment 2’ but some of your addresses show as ‘Flat 2’ — so contact the CRA to correct them.

2. Being registered to vote.

Why is it important:
Experian, Equifax and TransUnion use the electoral roll to find out your current address.
Top tip: Opting out of the open register won’t affect your credit score (but your letterbox will be thankful for less junk mail).

3. Applying for credit/opening new accounts.

Why is it important:
Any time you open a new account, or apply for credit, you’ll see a dip in your credit score. This is normal! And it’s because most new accounts or credit agreements will put a hard check on your credit file.

This is a check that your lender will have done on you ahead of agreeing to lend you money to make sure that you’ll be reliable in paying it back. A hard credit check leaves a record that other lenders can see. So they’ll know that you’ve recently applied for credit. The question now is, will you be reliable in paying this new credit back?

And that’s why your credit score temporarily drops. But after a few months of paying on time, your score should start to improve again. This is because you’re demonstrating that you can handle credit reliably. Going forward, try not to have more than one hard check every six months.

4. Missed payments.

Why is it important:

If you miss a payment, it leaves a stain on your credit file for six years (*faints dramatically*). The same goes for defaults (when you miss six payments), and County Court Judgments (when the company takes you to court to reclaim the money).

It’s not ideal for your credit file, but we understand that sometimes things don’t go to plan — it happens. The best course of action is to prevent the missed payments going forward. And remember that the further in the past these issues are, the less of an impact they will have on your ‘credit file’.

5. Errors in your report.

Why is it important:

If you see any errors in your three reports (like missed payments over six years old, ex-partners you don’t have a joint account with anymore, or anything looking to be fraudulent activity under your name) contact the CRA to correct it, as soon as you can!

6. Length of credit history.

Why is it important:

If your money goal is to purchase your first home in the future, you may be thinking about how credit scores affect mortgage applications. You’d be smart to want to work on improving your credit history as best you can long before applying. (People often tell us they wish they’d started sooner!)

If you don’t have enough credit history (or perhaps none at all), you can get started with Loqbox to help build your credit file just by saving, spending or renting. For just £2.50 a week, we’ll report to the CRAs to maximise your credit history, and build your financial knowledge at the same time!

7. Low credit utilisation.

Why is it important:

To a lender, having a low credit utilisation (using a small amount of your available credit) is more desirable because it looks like you can manage your debt and finances well.

If you have a credit card with a limit of £1,000 then aim to spend less than 30% (£299.99 or below). Or aim for even lower if you can. Try to give yourself some room to breathe and the lenders will love it too!

Still unsure about credit scores?

Dani from Loqbox explains exactly what the definition of a credit score is:

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