What is a credit score

December 2023

What Is A Credit Score In December 2023

 

When you apply for credit, such as a loan or credit card, the lender will frequently check your credit score to determine whether or not to lend you money. 

However, what is a credit score, and how is it determined? In this article, we will examine the intricacies of credit scores, including the factors that influence them and how to increase them.

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Types of Credit Scores

Lenders and financial institutions granting credit use numerous credit scores, but FICO® scores and VantageScore® scores are the most prevalent. 

The range of FICO® scores is 300 to 850, with higher scores indicating a more favourable credit history. VantageScore® ranges from 300 to 850, but a score above 700 is generally considered excellent.

How Is Your Credit Score Calculated?

Credit scores are derived from the information in a person’s credit report, which includes credit account information, payment history, credit utilisation rate, and more. 

To create your credit report, credit reference agencies such as Experian, Equifax, and TransUnion collect this information from various sources, including lenders and other financial institutions.

Factors That Impact Your Credit Score

Your payment history amounts owed, length of credit history, new credit accounts, and types of credit used can all affect your credit score. Let’s examine each of these in greater depth.

Payment History

Your payment history is the most influential aspect of your credit score.

According to our research, paying your bills on time and in full can help you maintain a good credit score, whereas missed or late payments can have the opposite effect and lower credit scores.

Amounts Owed

Your credit score is also affected by the amount of lending money you owe on your credit accounts.

In our experience, keeping your credit utilisation rate (the amount of available credit) low is crucial, as higher utilisation rates can indicate greater credit risk.

Length of Credit History

Additionally, the time you’ve had open credit accounts can affect your credit score.

According to our analysis, a longer credit history indicates a higher score and greater creditworthiness, whereas a shorter credit history indicates greater credit risk.

New Credit Accounts

Additionally, opening new credit accounts can affect your credit score. It is important to be mindful of the number of credit applications you submit.

Credit scoring models typically interpret many credit applications as a sign of potential risk.

Types of Credit Used

Additionally, the types of credit accounts you maintain can affect your credit score. A variety of credit accounts, such as credit cards, shop cards, and loans, is viewed more favourably than having only one type.

Understanding Different Types of Scoring Models

As was previously mentioned, many lenders and financial institutions utilise a variety of credit scoring models. Here are some of the most frequent:

FICO® Score 8 Model

This prevalent model considers payment history, amounts owed, and credit history length.

VantageScore 3.0 Model

This model also considers payment history, amounts owed, credit history length, and the types of credit utilised.

Experian PLUS Score™ Model

This model is based on your Experian credit report information and considers factors such as your payment history and outstanding balances.

How Can You Improve Your Credit Score?

If your credit score is not as high as you would like, you can take a number of steps to improve it. Here is some advice:

Paying Bills On Time

As previously stated, timely bill payment is one of the best ways to maintain a good credit score.

Accounts

Maintaining a low credit utilisation rate is also essential. According to our research, using no more than 30 per cent of your available credit can help you maintain a good credit score.

Paying Down Debt Rather than Moving It Around

It is also essential to focus on paying down your debt rather than simply reorganising it. According to our analysis, transferring debt from one credit account to another may not improve your credit score.

Want to know what information is held about you on your credit report?

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Data from all four Credit Reference Agencies: Equifax, Experian, TransUnion and Crediva
Try free for 30 days. Really easy to cancel – by Freephone or even online
Ensure your payments are correctly recorded
Understand what’s affecting your score

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Types of Credit Scores

Not Closing Unused Cards

Closing unused credit cards may seem like a good idea, but doing so can lower your credit score.

Due to the fact that closing a credit card reduces your available credit and can increase your credit utilisation rate, this is the case.

Requesting No More Than One Report Per Year

Multiple credit report requests in a short period can have a negative effect on your credit score.

Our experience has taught us that it is best to check your credit report annually and dispute any errors with the appropriate three credit bureaus together.

Check For Errors On Your Reports Regularly

Regularly reviewing your credit report for errors or fraudulent activity is essential.

To ensure that your credit report accurately reflects your credit history, you should dispute any errors with the relevant credit bureau.

Monitor Your Information Closely For Fraudulent Activity

Monitoring your credit report and financial accounts closely can help you detect fraudulent activity early on.

You must immediately notify your financial institution and the appropriate authorities if you discover fraudulent activity.

What Else Can Affect Your Financial Life Besides Your Credit Scores?

Your credit score is an important aspect of your financial life but it is not the only factor. Your finances can affect your employment history, income and debt levels, public records, and mortgage lender requirements.

A credit score quantifies one’s creditworthiness. Your credit score is based on the information in your credit report, which includes credit account information, payment history, credit utilisation rate, and more.

Your credit score will influence your payment history, credit utilisation rate, amounts owed, length of credit history, new credit accounts, and types of credit used.

By understanding these factors and improving your credit score, you can improve your financial health and realise your financial objectives.

What is a credit score, and how does it work?

A credit score is a numeric representation of an individual’s creditworthiness.

It considers a person’s credit history and other factors, such as payment history, credit utilisation rate, and types of credit utilised.

Our research indicates that the main credit reference agencies use a scoring model to determine an individual’s credit score.

This model assigns points to each creditworthiness factor based on its relative significance. The sum of all points is then used to calculate a credit score. Lower credit scores indicate a greater credit risk, whereas higher ones indicate a lower credit risk.

How to know your credit score?

There are multiple ways to determine one’s credit score. One option is to obtain a free credit score from credit reference agencies or lenders, which estimates your credit score.

Alternatively, you can purchase your credit report and score from a credit reference agency. The credit report provides a detailed breakdown of your credit history, whereas the credit score provides a number of lenders use to determine your creditworthiness.

According to our research, it is essential to regularly monitor your credit report and credit score for any errors or fraudulent activity.

Is getting a higher credit score good?

A credit score is beneficial because it reveals your creditworthiness and financial standing. A good credit score can result in lower interest rates and a greater likelihood of approval for credit.

However, a low credit score can make obtaining credit more difficult and may lead to higher interest rates or fees.

Maintaining a good credit score requires timely bill payments, a low credit utilisation rate, and a lengthy credit history.

Do I have a credit score of 18?

If you have established credit accounts, such as a credit card or a loan, you can have a full credit record and score at 18.

However, you may not have a credit score or history if you have not established credit. Building credit at a young age is essential because it helps establish a positive credit history and raises your credit score over time.

Good credit habits and solid credit history can be aided by making timely payments, maintaining a low credit utilisation rate, and limiting credit application requests.

What is a credit report?

A credit report is a comprehensive record of an individual’s credit history, which includes their credit accounts, payment history, credit inquiries, and public records.

According to our research, credit reference agencies like Experian, Equifax, and TransUnion collect this data from various sources, including lenders and other financial institutions.

This data is then used to determine an individual’s credit score.

How Is Your Credit Score Calculated

What are the main credit reference agencies?

Experian, Equifax, and TransUnion are the UK’s largest credit reference agencies. These agencies gather credit data from numerous sources, including lenders and other financial institutions.

They use this data to generate credit reports and credit scores that lenders use to determine a person’s creditworthiness.

What is a credit utilisation rate?

The credit utilisation rate is the proportion of a person’s available credit that is currently being utilised.

According to our research, a high credit utilisation rate indicates financial instability and can negatively impact a person’s credit score.

Using no more than 30% of available credit is recommended to maintain a credit file and a good credit utilisation rate.

What is revolving credit?

A revolving credit account is a type of credit account in which the borrower has a credit limit and can borrow and repay funds as needed.

Our analysis shows that credit cards and lines of credit are revolving credit accounts.

Purchases frequently involve the use of revolving or credit limits, which can have a significant impact on a person’s credit score.

What are your criteria is a good credit score?

In general, a credit score above 700 is considered to be excellent.

However, credit scoring models employed by lenders may make good scores vary, and what constitutes a good credit score may vary based on the lender’s criteria and standards.

Can store cards affect your credit score?

Yes, shop credit cards can affect your credit score. Store credit cards are a type of revolving credit account that can affect an individual’s credit score calculated by utilisation interest rate amount.

A high shop card balance can have a negative effect on a person’s credit score, whereas a low balance can have a positive effect.

What is the electoral roll or electoral register?

The electoral roll, or the electoral register, is a list of voters registered in a specific area.

According to our research, being on the electoral roll can positively affect a person’s credit score because it is proof of identity and residence.

How often should you check your credit report and score?

Checking your credit report and score at least once a year is advised.

However, if you are actively monitoring your credit or intend to apply for credit, it may be advantageous to check it more frequently.

What are the consequences of having a low credit score?

A low credit score can lead to difficulty obtaining credit, higher interest rates and fees, and restricted access to financial products and services.

It can also negatively affect employment and housing opportunities.

Can a high credit score guarantee loan approval?

While a high credit score can increase your likelihood of loan approval, it does not guarantee it.

When determining a good score and loan eligibility, lenders consider several factors, including income, employment history, and debt-to-income ratio.

How long does it take to improve a credit score?

The amount of time required to improve a credit score depends on a number of variables, including the cause of the score drop, the severity of the damage, and the steps taken to improve it.

It can take several months to see a significant score improvement.

What happens if you default on your loans?

A loan default can have severe repercussions, including damage to your credit score, legal action by the lender, and garnishment of your wages.

It can also make obtaining credit difficult in the future.

How do joint accounts affect credit scores?

Credit scores of both account holders can be affected by joint accounts.

Late or missed payments can hurt both credit scores, while high credit utilisation can increase the debt-to-income ratio for both account holders.

What is the impact of bankruptcy on your credit score?

The bankruptcy will remain on your credit report for up to ten years, significantly lowering your credit score.

Additionally, it can make it difficult to obtain credit or financial services in the future. However, it is possible to rebuild credit with time and responsible credit habits.

How long do missed payments stay on your credit report?

Depending on the type of debt and state in which you reside, missed payments can remain on your credit report for up to seven years.

A missed payment typically has a diminishing effect on your credit score over time, but it can still affect your ability to obtain credit in the future.

Can you dispute errors on your credit report?

You may dispute inaccurate information on your credit report. You should contact the credit bureau and provide evidence to support your claim if you discover any errors.

If the bureau determines the information is inaccurate, your credit report will be updated accordingly.

What is a soft credit inquiry, and how does it differ from a hard credit inquiry?

When a person or organisation checks your credit report for informational purposes, such as a pre-employment background check, this is known as a soft enquiry.

Soft credit inquiries have no impact on your credit score. A hard enquiry occurs when you apply for credit, such as a loan or credit card. A hard enquiry can negatively impact your credit score and remain on your credit report for up to two years.

How does having a co-signer affect your credit score?

Your credit score can be affected positively or negatively by having a co-signer, depending on how the account is managed. If the co-signed account is handled responsibly, it can boost both parties’ credit scores.

However, improper account management can hurt both parties’ credit scores.

How does moving house affect your credit score?

Moving does not affect your credit score directly. However, missing payments on debts or bills during moving can indirectly affect your credit score.

In addition, when you move to a new residence, you must pay bills and ensure that your creditors have your current contact information to avoid late payments.

Can closing a credit card hurt your credit score?

In some instances, cancelling a credit card can lower your credit score. If the secured card was your only credit account, the closure could have a negative effect on your credit history and credit utilisation ratio.

However, if you have other credit cards with a positive payment history, the effect of closing one card will be diminished.

How does settling a debt affect your credit score?

Credit scores can be negatively impacted by debt settlement. It usually leaves a notation on your credit report indicating that the debt was settled for less than the total amount owed.

The effect of debt settlement on one’s credit score can vary but is typically negative.

What is a credit utilisation ratio, and how is it calculated?

A credit utilisation ratio is the percentage of available credit currently being utilised. It is determined by dividing the outstanding balance by the total credit limit.

A high credit utilisation ratio can affect your credit score negatively.

How does a short sale affect your credit score?

A short sale can affect your credit score negatively. It may result in a notation on your credit report that the debt was settled for less than the full amount owed.

Depending on the specific circumstances, the effect of a short sale on your credit score can vary.

How long does bankruptcy stay on your credit report?

Depending on the type of bankruptcy filed, bankruptcy can stay on your credit report for up to ten years.

It can substantially lower your score and impact your ability to obtain credit in the future, but its influence diminishes as you demonstrate responsible credit behaviour.

Want to know what information is held about you on your credit report?

Checkmyfile can show you, in one report, data from the leading 4 agencies in the UK

Get an independent view with your checkmyfile Credit Score
Data from all four Credit Reference Agencies: Equifax, Experian, TransUnion and Crediva
Try free for 30 days. Really easy to cancel – by Freephone or even online
Ensure your payments are correctly recorded
Understand what’s affecting your score

Read some recent 5 star client testimonials, on Trustpilot, about Checkmyfile’s comprehensive credit report

Try free for 30 days and get the information that you need, then £14.99 per month. However, you can cancel online at any time. If you sign up, we will receive a small payment for introducing you.  This helps us produce more content for the site.

 

Meet the author

Rob Atherton

Rob Atherton

Rob writes and edits the content produced by the rest of the team. He has a degree in History from Leeds University and has producing, reviewing and editing the site since 2016

Meet The Team

Frequently Asked Questions

How long does it take to improve your credit score?

Credit scores are calculated over six years, so improving your score can be time-consuming. However, timely bill payments, a low credit utilisation rate, and lengthy credit history can help improve your credit score. 

It is essential to regularly check your credit report and credit score for errors or fraudulent activity and to dispute any inaccuracies with the relevant credit bureau.

Can I check my credit score for free?

Credit reference agencies and lenders will provide free access to your credit score. Some credit reference agencies offer credit reports and scores without charge, while others do so for a fee. 

You must check your credit report and frequently score to ensure they accurately reflect your credit history.

Does closing a credit card affect my credit score?

Yes, cancelling a credit card may affect your credit score. This is because closing a credit card reduces your available credit and may increase your credit utilisation rate, which can hurt your credit score. 

To maintain a positive credit history and utilisation rate, it is generally advised to keep credit cards active, even if they are not being used.

What is the difference between a credit score and a credit report?

A credit score is a numerical representation of a person’s creditworthiness, whereas a credit report is a comprehensive summary of a person’s credit history. 

The information in a credit report, which includes credit account information, payment history, credit utilisation rate, and more, is used to calculate credit scores. 

Lenders and other financial institutions use credit scores to determine an individual’s credit risk, whereas credit reports provide a thorough summary of a person’s credit history.

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