demystifying credit scores

Is your credit score in need of improvement? Here we explain all you need to know about credit ratings, the impact they can have on your financial footprint, and tips for improving them.

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People aren't taught about credit scores in school, making them feel like a puzzling enigma. Sometimes, you might not even think about your credit score until you've applied for a loan, like car finance, and are rejected.  

So, in this beginner's guide, we'll unravel the mysteries of credit scores, answer your most frequently asked questions and explore how to make it work in your favour. 

contents

what are credit scores

checking your credit score

hard and soft credit checks

credit reports

how to improve credit score

credit score and mortgages

what are credit scores? 

Your credit score speaks volumes about your financial trustworthiness. This score is derived from various aspects of your financial history, including your credit accounts, outstanding debts, and payment track record. 

The higher your score, the more likely you'll be approved for a loan. However, many people don’t realise that it can also affect the interest rate you pay. 

A counter-intuitive belief is that having limited or no credit history equates to a good credit rating. However, this absence can harm your score. Lenders find it challenging to assess your creditworthiness when you don't borrow and demonstrate your ability to repay on time. So, even if you're financially responsible and rarely borrow, having a responsible credit history is crucial. 

how can I check my credit score? 

In the UK, three credit bureaus — Equifax, Experian, and TransUnion — collect and maintain your credit information. Lenders rely on these reports when you apply for credit. To ensure your file is accurate and up to date, reviewing all three credit reports at least once a year is recommended. You can’t ‘over-check’ your credit report, as these aren’t recorded on your report. It's important to note that outdated addresses or incorrect details can harm your credit score.

what is a hard and soft credit check?

A hard credit check (hard search) is initiated by lenders when you apply for credit. This will affect your credit score and be visible to other lenders for up to two years. Hard searches will always require your explicit consent. If you need clarification, enquire with the company before going ahead. 

A soft credit check (soft search) is typically used for non-lending purposes, such as background checks or when you check your credit report. This does not impact your credit score and is only visible to you on your credit report.  

what's in your credit report?

Generally speaking, credit reports contain the following information:   

  • personal details, including your name, date of birth, current and previous addresses and whether or not you're on the Electoral Register  

  • details of your credit accounts, including credit cards, mortgages, loans and store cards, plus information on any late or missed payments  

  • county Court Judgements (CCJs), house repossessions or bankruptcies that have happened to you over the last six years   

  • details of people you're financially linked to (this could be someone you live with or share a bank account with)  

  • your current account provider and other account details  

what's not included in your credit report?

  • your marital status, gender and race
  • medical information
  • your buying habits and transactional data 
  • bank account balances
  • your level of education
“Even as a debt advisor, I do not believe all types of debt are bad. Credit and borrowing have an extremely important role in any healthy, functioning society. ‘Good’ and ‘bad’ debt are completely personal to you and your financial journey. Remember, your debt should work for you, not burden you.”  

Paul Day

specialist debt advisor at caba

what is a good or bad score?

The definition of a 'good' or 'bad' credit score can vary among credit agencies and lenders. While a higher score is generally better, specific thresholds may differ. The key takeaway is that maintaining a higher score improves your chances of loan approval and favourable interest rates. However, even if your score is less than perfect, you can take steps to improve it. 

how can I improve my credit score?

Boosting a poor credit score is achievable with some of these steps as they provide quick results, while others must be built up. There are also apps such as ClearScore (for Equifax), Credit Karma (for TransUnion) and the MoneySavingExpert app (for Experian) where you can monitor your credit score and receive notifications for these improvements: 

register to vote

For a quick boost, join the Electoral Register and remember to update your address when you move. This can improve your credit score as credit lenders can easily find your name and address through multiple avenues. You can do this simply on The Electoral Commission website.

check addresses on old accounts

Outdated addresses on accounts like mobile phone contracts, bank accounts, and other financial borrowing can cause issues with identity checks. Check that all your account details are up to date in order to help your credit score.  

cancel unused credit cards

Reducing your available, unused credit limits can help you appear more creditworthy. If you borrow very little, aim for one credit card account you use and pay off regularly.  

pay bills and debt repayments on time

Timely payments on your loans and credit cards are crucial, as well as direct debits for a range of products and services. Ensuring you know the timeline of these outgoings and have budgeted correctly will help. Examples of these include mobile phone contracts, monthly payments for products, and 'buy now pay later' schemes - which can affect your credit score if you miss the payments or they bounce.  

You must also make 'minimum payments' to your credit card accounts each month. The timings and amount for these minimum payments will differ between lenders, so be sure to check your agreements.  

If you anticipate a problem, you can contact the company or your bank in advance to explore alternative arrangements and ensure your credit record is not impacted. 

try to avoid payday loans

This type of loan can negatively impact your creditworthiness as it is often seen as a sign of financial instability. 

sever financial ties with former partners

If you're no longer financially linked to someone, request that credit reference agencies remove them from your credit report. 

where possible, reduce your debt

Examine your debts to determine if you can consolidate or pay off any of them sooner. Aiming for under 30% credit utilisation is recommended, which means you should only be borrowing under 30% of your credit limit. For example, if your credit limit is £1,000, aim to borrow under £300 at a time.  

Here at caba, we know that being in debt can be a deeply personal matter and difficult to handle when it spirals. Our friendly and non-judgmental debt advisers will give you the time and space to share your worries. Visit our debt support hub for more advice. 

check your credit report for incorrect statements

Unfortunately, credit reports can sometimes include incorrect financial agreements or information. To ensure you're not being penalised for this, check your credit report at least once a year. This information will not be shown on credit score apps or websites; you'll need to request to download your report from one of the three major credit bureaus.  

If, for some reason, the credit reference agency refuses to correct a mistake within your file, you can add a notice of correction to your report or make an official complaint to the Financial Ombudsman.  

avoid multiple credit applications in a short space of time

Each application for credit is recorded on your file for up to 24 months. Too many applications in a short space of time can look unhealthy and result in applications being rejected.

  • Join The Rental Exchange initiative - every time you pay your rent on time, your credit score gets boosted! Sign up here – www.experian.co.uk/rental-exchange   

what credit score do I need to apply for a mortgage?  

This is a common question for most when taking those first steps towards buying a home. Whilst a higher credit score generally benefits mortgage approval and lower interest rates, lenders consider factors like your overall income, affordability, and expenses.  

Demonstrating your ability to afford mortgage payments even in changing circumstances can improve your chances of approval. Remember that having a less-than-perfect credit score doesn't necessarily prevent you from getting a mortgage.  

Understanding and managing your credit score is essential for making informed financial decisions. Regularly monitoring your credit reports, taking steps to improve your score, and being aware of your creditworthiness can open doors to better financial opportunities. 

Want to learn more about finances and hear from the experts? Listen to our podcast – The Cash Conversation where we talk with financial experts about all things personal finance, debt, budgeting and savings.

how we can help 

If you have concerns about your credit score or financial history, our team of specialist advisors is here to help you get your finances on track. All our services are free and strictly confidential. Get in touch with our friendly advisors today to take control of your financial future. 

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your questions answered 

Who is eligible for support?

We support past and present members of the Institute of Chartered Accountants of England and Wales (ICAEW), ACA students, ICAEW staff members, and the family and carers of members and students. 

  1. No matter where your career takes you, past and present members of the Institute of Chartered Accountants of England Wales (ICAEW) are eligible for caba’s services for life, even if you change your career and leave accountancy 
  2. ACA students (ICAEW Provisional Members) who are either an active student or have been an active student within the last three years are eligible for caba's services 
  3. Past and present staff members of the ICAEW or caba are eligible for caba's services for life, even if you leave either organisation. Please note, for former employees, our financial support is only available to those who have had five years continuous employment with either organisation 
  4. Family members and carers of either an eligible past or present ICAEW member, ACA student or past or present employee of the ICAEW or caba are eligible for caba's support. We define a family member as a: 
    1. spouse, civil partner or cohabiting partner 
    2. widow, widower or surviving civil partner who has not remarried or cohabiting with a partner 
    3. divorced spouse or civil partner who has not remarried or cohabiting with a partner 
    4. child aged up to 25. Please note, children aged between 16 and 25 are not eligible for individual financial support 
    5. any other person who is dependent on the eligible individual supporting them financially or are reliant on the eligible individual’s care 
    6. any other person on whom the eligible individual is reliant, either financially or for care 

You can find out more about our available support both in the UK and around the world on our support we offer  page. 

Are your services means-tested?

If you need financial support, we carry out a means test where we consider income, expenditure, capital and assets.  

*Please note none of our other services are means-tested. 

I’m an accountant, but not a member of ICAEW, can you still help?

Unfortunately not. We only support past and present ICAEW members, their carers and their families. If we are unable to support you, where possible we will point you to help elsewhere.

caba has supported me in the past; can I receive support from caba again?

We understand that circumstances change. If we’ve helped you in the past there’s no reason why we can’t help you again. You can contact us at any time. Please call us if you need our help.

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