How do Credit Scores work?

02/03/2023

Unsure of how you got the Credit Score you have, what impacts it, and how you can improve it?

Your Credit Score and credit report can affect any application that you make for either a credit or loan product. Any mortgage you've had or plan to take out in the future or any credit cards you apply for will be assessed by your Credit Score.

At a glance, credit scores help lenders decide if you should be approved for a loan and also what loan terms would be suitable to offer you. The process is handled with little to no human oversight, and so making sure your credit score is well rounded and looking the best it can be is key. The algorithms and formulas that review Credit Scores will evaluate and make a decision based on your borrowing history.

But what exactly is your score, what can you do about it, and what can positively or negatively affect your score? We've put this guide together to help you out.

 Written by Harvey Perry
JN Bank UK Digital Marketing Executive

Your credit score is a number made up by information compiled by Credit Reference Agencies, information such as your credit history, and primarily used when you are applying for credit and loan products with providers. Experian, Transunion, and Equifax are all credit reference agencies that you may have heard of before. Your credit score works in the background while you are going about your daily business, but as a history of your financial record.

This log is then called up for examination by Credit Reference Agencies when you submit a credit application for a Credit or Loan product like a Home Improvement Loan or a Car Loan. It is used to inform lenders on how quickly you are paying back money you have borrowed, whether you have any debt to pay back, and overall, what kind of borrower you are. Although it is real people who work in Credit Reference Agencies, as Creditors, and Lenders; it is ultimately algorithms who complete the brunt of the work assessing your credit score and making the decision on whether to lend to you or not, having assessed the data and reviewing your application.

Having your Credit Score assessed through Credit Reference Agencies is common practice when applying for credit applications, such as:

• Mortgages 
• Credit cards
• Personal loans
• Car finance
• Overdrafts

Your Credit Score isn’t made up of your shopping habits, where you like to shop or what you like to buy. Your Credit Score and the information pulled through in your Credit Report is more about your spending habits and repayment probability. Here are a few key pieces of data that lenders use to compile your credit score:

Credit History – Firstly, your Credit History can have an effect on your credit score because it will inform lenders on how likely you are to repay the money you have borrowed from them, and how on time you have been in the past. Although lenders have different approaches and algorithms to assessing credit score data, your credit score is still held by Credit Reference Agencies and can be viewed. If you have been able to create a habit of making your repayments in full and on time with previous lenders, then you are likely to be looked upon more favourably when applying for mortgages, credit card applications, and Loans products in the future. 

Current and Past Credit Agreements – Also, any existing credit agreements you have, or have had in the past, will be considered when making a credit or loan application (mortgages, personal loans, existing credit cards). Your credit utilisation is also a huge factor (the amount of credit you use per loan) and can have an impact on your credit score.  

Your Personal Information – Finally, the information you have submitted as part of the credit or loan application will also be used when creditors are assessing you. This will include, but is not always limited to, your income, current employment status, address, rent/mortgages payments, dependents, etc.  

Key information such as your employment and income are key for a credit to understand whether giving you credit is something they are willing to take a risk on.  

Although you might not be 100% sure of what they do, you might have heard a few of the names of the main Credit Reference Agencies in the UK – Experian, TransUnion, and Equifax. When you send off an application for a credit card or personal loan, one of these credit reference agencies will be contacted to provide a snapshot on whether you are a favourable applicant, by examining your credit score. 

Although your credit score is quite an extensive look at your credit history, it is not a permanent record that cannot be corrected or improved. It’s important to know that most of the information on your file will be removed after six years such as County Court Judgements (CCJs) or filing for bankruptcy. Once a credit reference agency has reported back to the lender you submitted your application with, the lender will then make an assessment on whether you can be approved for the product you have applied for.

Experian do offer the ability to check your credit score without you needing to pay a fee, by creating a free account with them. After submitting a few personal details about yourself and your address, you will be able to view your Experian credit score, compare credit and loan products, view your eligibility for financial opportunities, and how you can boost your score.

Even if you are someone that does not like to use credit, it’s important to generate a healthy credit score and not avoid it at all costs. You may at some point in the future need to apply for credit or a loan such as a mortgage, so it’s ideal to build a healthy amount of credit even if you don’t see yourself relying on it too often. 

It can take quite a bit of time to see positive change on your credit score depending on your financial circumstances, but we have put together a list of things you can do to start to see positive changes on your credit score: 

• Stay within your credit limit as best as you can, and make sure you always make your credit or loan repayments on time. Late or missed payments can remain on your credit report for up to six years.  
• Ensure you are registered to vote at the address you currently live in so that lenders can reference you against the address you live at. 

• Make sure to check your credit regularly, using free services like Experian, to know where you are with your credit scores and any other quick wins you can do to boost your score. 
• Don’t apply for a lot of credit all at once. You can use eligibility checkers on loan and credit product websites to see if you are pre-approved for a product application before even applying.