Credit scores: what you need to know

In this blog, we explain what a credit score is, why they're important and what you can do to improve yours.

What is a credit score?

A credit score is a number that shows potential lenders if a person is considered suitable to borrow money. The credit score is derived from the information in a credit report. The higher the score, the better a borrower looks to potential lenders as it suggests there's a lower chance that the borrower will miss a payment. A credit score is based on your credit history. e.g. repayment history, total levels of debt, and other factors.

What is a credit report?

In a nutshell, a credit report provides a detailed record of your credit history and financial behaviour.

The report provides lenders with a summary of how you manage your finances. It typically includes the following:

• Your personal information
• Information about your credit accounts (mortgages, credit cards, personal loans and other forms of credit)
• Payment history
• Credit enquiries (which are made when you apply for credit or have background checks)
• Any public records related to your financial activity, for example, if you have been made bankrupt

Why is your credit score important?

A good credit score increases your chances of getting the best loans, credit cards, mortgages and other forms of credit.

Having a bad credit score makes it more difficult to get approved for credit. Lenders view you as a higher risk and may be reluctant to approve your credit request. If you do get approved the rates and fees may be higher than if you had a credit score. This is because lenders tend to increase interest rates for individuals who have bad credit scores, which can result in higher borrowing costs.

Your landlord or letting agent may also conduct a credit check to determine if you’ll be likely to pay your rent on time. You’re more likely to be accepted if you have a good credit score. Your application may be rejected if you have a poor credit history.

How do you know what your credit score is?

You can check your credit score for free with a credit report provider. At Smart Money People, we have reviews of all of the best free and paid-for credit report providers on the market. We collect reviews of credit report providers so you can read the experiences of other people to see which company is the best fit for you.

What is a good credit score?

In the UK, there is no universal score used by all lenders and CRAs (credit reference agencies). So, it’s not possible to directly compare the different CRA scores. Each company has its own scoring model. When you log in to the credit report provider you should see what your score is and what it's out of, so you can get an idea of how you're doing.

How can you improve your credit score?

With time and effort, you can improve your credit score. The key to improving your credit score is to show lenders that you’re a reliable borrower. Here are a few positive actions you can take:

• Make sure you pay your bills on time (setting up a direct debit is a good way to make sure you don’t miss payments)
• Registering on the electoral roll
• Try to reduce any debt you have
• Manage credit responsibly
• Not applying for too many credit cards or loans in a short period of time (yes, this can affect your credit score)
• Make sure the information on your credit file is accurate and up to date
• Consider getting a credit building card

It’s worth noting that if you opt for a credit building card, you need to ensure you use it responsibly. You need to make payments on time and stay within your credit limit to build your credit score. It can be a good option for those who have limited or no credit history or have experienced a bump in the road on their credit journey.

It’s important to do your own research before committing to any financial product. If you're looking to improve your credit score by using a credit building card, read our reviews on the different products available to see what others think of them and which one could be right for you.