Some people aren’t kind about credit scores. Comments on the social media platform Reddit range from jabs calling them “useless” or “ridiculous” to stronger scoldings saying they’re a “gimmick” or even a “scam”.
However, it can be a mistake to ignore your credit score. Dani Whitehead, Chief Marketing Officer at credit-building app Loqbox, told NerdWallet: “Credit scores are a real and significant factor in a person’s financial life, with tangible impacts on borrowing costs, financial opportunities, and overall wellbeing.”
Your credit score can be used by firms, from mortgage and car finance lenders to utilities and phone contract providers, to decide how risky it is to loan money to you.
Here we demystify your credit score and explain how to use it to your advantage.
Credit scoring is a “complicated landscape”
Much like a car engine or computer, many of us may not consider how our credit scores work until something goes wrong. Whitehead told us that a key challenge for Loqbox users is a “limited understanding” of how credit scores work.
For starters, you don’t have one universal credit score. Instead, there are three different credit reference agencies (CRAs), each providing data to lenders, who then have their own way of assessing a credit application. What’s more, the three CRAs in the UK – Equifax, Experian and TransUnion – all calculate your credit score differently. Firms may also report to one credit reference agency but not to the others, sometimes leading to variations in the data CRAs base your score on.
Importantly, the scores you get from the CRAs can’t tell you for certain whether a credit application will be successful or not. They simply represent how healthy your finances appear based on the credit information they have. Your credit information on its own doesn’t give lenders a full picture.
A lender usually looks at more when deciding on an application. This includes whether you can afford the repayments and sometimes even any data it already has about you, for example if you’ve taken out credit with it previously.
Some lenders also use their own scoring systems and won’t request a score calculated by a CRA, just the data in your credit file.
“So it is a very complicated landscape,” James Jones, Head of Consumer Affairs at Experian, told NerdWallet. But this “doesn’t justify” writing off the scores that the CRAs give to the public to help guide them, he said.
A score helps you to check the health of your credit history
Your credit score is based on the last six years of your credit history. If your score isn’t where you’d like it to be, it warrants further investigation.
While you have three scores you can check, they should look similar – unless one CRA has very different information about your credit history than the others. But this would be unusual, according to Jones.
He suggests that you think of your credit score as an “expert” view on the health of your credit data. But wherever you are in the process of applying for credit – whether you’ve recently been refused, or want to apply for a mortgage next year – you should look at your credit score “hand-in-hand” with your overall credit report.
The data in your credit report is the “nuts and bolts” of your score, he added.
How to use your credit score to your advantage
1. Check scores based on data from each CRA (for free)
Your credit history is usually an important part of a lender’s decision to approve you for credit or not.
However, when applying for credit, you won’t know which data the lender will request to see, so checking scores based on data from all three CRAs helps you build a complete picture.
It’s possible to do this for free by using the right services:
- Experian’s free account gives you access to a credit score based on its data
- ClearScore uses Equifax data to calculate a credit score for you (it costs £14.95 a month to access your credit score directly from Equifax)
- TotallyMoney and Credit Karma base their credit scores on TransUnion data and are both free
Once you’ve signed up to services like these, they should usually alert you about changes in your score and report. If you want to check your full credit history, the CRAs are required to give you a free statutory credit report.
You’re using your score to your advantage by accessing these services, because you can quickly discover elements of your credit report you could improve without paying a penny.
2. Give yourself enough time to lower the cost of borrowing
One of the benefits of a score is that it’s “your credit history in a three-digit number,” said Jones. Checking it helps you see how a lender may view your data when you apply for credit. While there is a common misconception that checking your score damages it, this is a myth – you can check it as many times as you like without causing it harm.
Doing this well in advance of applying for credit means you’ll have time to dive into your data and understand where you can improve, helping you to lower the cost of borrowing.
“A good credit score opens doors to better financial products, including loans, mortgages, and credit cards with lower interest rates and fees,” said Whitehead.
For mortgages, Jones suggests checking your credit score as much as a year before applying. If it’s not great, “you can take steps to build some positive credit history…that’s not something you can do a month before you apply.”
3. Use eligibility checkers for greater confidence
Checking your credit score and eligibility, along with understanding your wider credit history, can help you to feel more confident about being accepted for credit.
Whitehead told us that lenders aren’t required to pre-approve an application or tell the borrower about the likelihood of being accepted before they apply. “This can lead to repeated applications and rejections, which can further damage a person’s credit score.”
Lenders usually run a hard credit check when you apply, which shows on your credit report. Too many hard searches over a short time can damage your credit history, because lenders may believe you’re relying on credit and struggling financially.
While lenders can’t confirm whether you’ll be accepted for credit or not before you apply, many offer tools to check your eligibility and the interest rate you may receive.
You usually need to agree to a soft credit search when using an eligibility checker, which only you can see on your credit report. Soft searches aren’t visible to lenders and don’t damage your credit history, so eligibility checkers are a useful weapon in your arsenal.
Jones told us that “doing your homework” and only applying for credit that you’ve got a realistic chance of getting can minimise the chances of being rejected. You can use your credit score to your advantage here, because it indicates how the lender may view your application.
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