Understand your credit score

First published 23 October 2017 • Updated 08 March 2018

If you want to borrow money (and you almost certainly will have to if you want to buy your own home) then a lot will depend on your credit score. A good credit score could help you to be offered the best value mortgage deals; a poor score could mean you’re offered more expensive mortgages or even none at all.

What is my credit score?

Your credit score, or credit rating, is a lender’s own estimate of how good a borrower you will be.

How is it worked out?

Your credit score is assessed every time you apply for a credit-related product (e.g. a mortgage, loan, credit card or even a phone contract). It may be different every time, and can vary significantly between providers and across different credit reference companies. In short, you have no universal credit score – just a credit history that lenders and ratings agencies may interpret in different ways.

What is my credit history?

Your credit history (stored on your credit report or file) is the record of all your previous borrowing. It’s a good idea to get a look at yours before applying for credit, so you can check it’s accurate. A mistake could lead to a rejection – and a rejection can in turn damage your credit history. You can request a basic credit report from any of the credit reference companies, though some charge fees (and may charge more for more detailed reports).

What are providers looking for?

This depends on the product you are taking out. If you’re applying for a mortgage, the lender wants evidence that you will repay the loan and won’t default on it. A good history of borrowing and repaying on time is therefore very important.

If you are applying for a credit card, however, the criteria may be slightly different. A history of perfect repayment may sometimes count against you, as the card provider wants to make money from you.

Beware of having too little credit history. If you have never borrowed money, providers have no evidence of what sort of customer you might be. You may therefore need to build up your credit history before applying for a mortgage.

Why is a good credit score important?

Your credit score affects not just whether or not you’ll be accepted for a product (such as a mortgage or credit card) but also the quality of the deal you’ll be offered. In other words, having a good credit score makes life much cheaper for you in the long run.

What can damage my credit score?

• Aside from the obvious things, such as a poor history of repaying debt, numerous other factors can have an impact.
• Frequent credit applications – each one will lead to a credit check, and too many of these could alarm other lenders.
• Lots of debt – too much debt is a warning sign, even if you keep up with repayments.
• Financial links with others who have poor credit history – such as joint bank accounts, joint mortgages and (sometimes) joint utility bills.
• Old credit cards or store cards – too many of these can put lenders off, especially if they are registered to old addresses.
• Mistakes – errors can happen anywhere and lead to your application being rejected.

How can I improve my credit score?

If you think your credit history needs improving, start working to improve it in the year before you apply for your mortgage. Some simple ways to do this include:

• Use a credit card regularly for small amounts and pay it off in full every month
• Pay down debts
• Avoid applying for lots of credit-related products
• Make sure you’re on the electoral register
• Break any unwanted financial ties (e.g. any old shared bank accounts)
• Ask to see your credit report and correct any mistakes

Your mortgage broker can also give you tips on ways to improve or protect your credit score.