August 9 2022

How is your credit score determined?

The UK has the fourth highest percentage of credit card users in Europe. But for many, there are still misunderstandings about how credit data is used. Here we break down how your credit score is determined and what you can do to improve it.

What is your credit score?

Your credit score helps banks, mortgage brokers, and businesses decide whether to lend you money. This includes mobile phone companies and utility providers who give loans in the form of credit when you pay in monthly instalments.

MoneySavingExpert defines it as a score that helps lenders predict someone’s future financial behaviour based on their past financial history.

Having a higher score has many benefits. Before we look at what they are, let’s look at how your score is determined.

How do lenders determine your credit score?

Credit scores are determined from your credit data report. If your credit score is a predictor of future financial behaviour, then your credit report would be like your financial CV.

This report includes your personal details, like your date of birth and home address. It’ll also show information about an individual’s financial past. For example, any outstanding loans, late payments or court judgements.

All three credit reference agencies have different methods of calculating your credit score.  But they will all use the information from this credit report to do it.

What factors contribute to a good credit score?

Knowing what contributes to a good score can help you take control of your credit rating and ultimately your financial future.

We’ve listed the seven most important factors below:

1. Sticking to payment schedules

Surprisingly, a survey by Comparethemarket found that 54% of 16 to 24-year-olds were unaware that a missed payment could negatively affect their credit score.

For this reason, keeping up with payment schedules reflects positively on your credit score.

2. Staying within your credit limit 

Your credit limit is the amount your bank or credit card provider agrees to loan you. This limit can apply to your bank overdraft or your credit card. 

Clearscore explains that it’s a good idea to use no more than 30% of your credit limit. This is because using a higher percentage of your limit signals to lenders that you may be in financial difficulty. 

3. Number of credit applications

Every credit application you make is visible to the next lender. Too many hard credit checks during a short space of time can be damaging to your credit score. 

Global credit reporting agency Equifax suggests asking lenders to do a soft check first. A soft check won’t damage your score or show up on your credit report. 

Soft checks are useful because it lets lenders see if you are eligible for a loan and how likely you are to be accepted before you apply. 

4. Using a credit card for cash withdrawals

Future lenders see frequent cash advances as a sign of poor money management. Using a credit card responsibly can improve your credit. But missing payments or withdrawing cash too often is likely to damage your score.

5. Being on the electoral (voting) register 

Many people don’t realise that being on the electoral roll isn’t just important so that you can vote. In fact, a whopping 72% of young people don’t know that not being on the electoral roll could damage their credit score.

6. Number of previous addresses

Moving too often can negatively affect your credit. Credit agencies such as Clearscore say this is because lenders like stability. Frequently moving (which comes with its own financial challenges) could be taken as a sign of instability. 

Advantages of a higher credit score

When lenders determine your credit score as high or good, there are lots of benefits for you. Here are some of them:

1. Unlock more sources of credit

Provided we approach loans responsibly, having access to credit at the best rates of interest can help achieve certain financial goals. Having a good credit score can help open the door to funds that can help you make empowering decisions. 

2. Pay less interest

A higher credit score means loan providers see you as low risk and can give you better rates of interest. This could result in substantial savings as you’ll pay less interest than someone with a lower credit score.

3. Pay less for your car insurance

If you pay your car insurance monthly, it’s considered a credit agreement and the provider will run a hard credit check. A better credit rating can be a factor in helping you get a lower monthly premium for your insurance.

4. More choice with your mobile phone contract

A monthly contract is also a credit agreement and phone providers run credit checks before offering deals. A higher score can mean a better deal.

5. Pass landlord checks more easily

Landlords sometimes run credit checks. Having a higher score generally indicates to landlords that you are a less risky tenant when it comes to paying the rent on time.

6. Negotiating power

A higher credit rating gives you the power to negotiate. You’re in a better position to ask for a better interest rate or an increased credit limit.

Seven tips to improve your credit rating

Now we know what the benefits of a higher credit score are. Let’s look at ways to get you there.

We’ve collected the best tips from Experian, Clearscore and Equifax to help you be in the best possible position for when your credit score is determined. 

1. Proof of address

If you can, make sure you’re on the electoral roll (being registered to vote).

If you’re not a UK citizen, there’s a solution. Ask all three credit agencies to add a note of correction to your report. This tells potential lenders that you can provide proof of address through a utility bill or driving licence.

2. Make regular payments on time

Consider setting up direct debit payments so that you never miss a payment for things like credit cards. You can always set up a minimum and then pay more if you can.

3. Keep credit utilisation low

Generally, you should aim to use no more than 30% of the credit available to you. While there is no definitive answer to how many credit cards you should have, it’s worth considering only having as many as you can responsibly manage.

4. Consider boosting your credit score

Experian offers a free service called a credit boost which Forbes magazine says can be useful for those with a thin credit history.

The credit boost with Experian means it looks for examples of responsible financial behaviour. It then adds this information to an individual’s report for future lenders to see. 

Examples of responsible financial behaviour include digital subscriptions and council tax bills which are not normally included on an individual’s report and therefore don’t normally count towards their credit score. 

5. Check for fraudulent activity

Fraud alerts damage your credit rating and are potential red flags to lenders. Experian explains how these alerts can be easily removed.

Even a typo or misspelled name can affect how your credit score is determined, so check all your personal information is correct.

6. Keep old lines of credit open

Old, well-managed credit cards usually improve your score because lenders see lines of unused credit open. So consider keeping your old bank account or credit card even if you no longer use them.

7. Consider getting a credit builder card

People with thin credit files can use credit building credit cards to help them build up their credit rating. By proving financial responsibility with well managed regular payments, users may have access to better rates of interest.

8. Remove negative data

If you have any County Court Judgements (CCJs) on your report, credit agencies like Experian explain how to get them removed or set aside. Once removed, it no longer negatively affects how your credit score is determined.

What if I have poor credit?

If you have a low credit score or a thin credit report, the good news is that you can improve it.

Poor credit doesn’t mean you can’t borrow money or get a mortgage. Secured loans, personal loans, and guarantor loans are some alternatives.

Another option is payday loans, although many people are realising that on-demand pay (also called earned wage access) is a safer and more cost-effective option.

Using on-demand pay from Openwage doesn’t damage your credit score because there are no credit checks carried out and it won’t show up on your credit report either. That’s good news for your credit rating.

A good credit score can unlock more opportunities

There are simple things you can do to improve your credit rating. Knowledge is power, so it’s a good idea to know what can negatively and positively affect your credit score so you can make the right decisions. 

As a final note, when lenders determine your credit score, they check many things. Some of these will show up on your credit report, so it’s worth considering checking your own credit report regularly using one of the three credit reference agencies. 

The information in this article is for general information only. It does not constitute professional advice from Openwage. Openwage is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information in this document relates to your unique circumstances.