Your credit score is a number that plays a big part in your financial life, whether you realise it or not. It can determine whether a lender will grant you a loan or a credit card and whether you qualify for the best deals. But what exactly is a credit score? Let’s take a look.

What is a credit score?

A credit score is a three-digit number, typically between 300 and 999, that indicates how reliable you are when it comes to borrowing and repaying money.

Lenders use your credit score to help determine the likelihood of you repaying anything you borrow. Essentially, it’s their way of planning for the risk they’re taking by lending you money.

The higher your credit score, the lower your perceived risk of default. So a higher score gives you the best chance of being accepted for the best possible rates. On the flip side, a low credit score may make it trickier for you to access credit at all, and it will certainly make it harder to get the cheapest interest rates.

Your credit score is not just used for loans and credit (e.g. credit cards, car loans and mortgages). Insurance companies also use it to determine whether to offer you insurance and how much to charge you.

What affects your credit score?

A number of factors can affect your credit score, including:

• Your credit repayment history (including missed or late payments)
• How much of your available credit you are using (this is known as your credit utilisation ratio) and your total debts.
• Public records (e.g. whether you are on the electoral roll and whether you have any county court judgements or individual voluntary arrangements).
• The number of hard credit searches on your credit report (which occur when you apply for credit).

How is your credit score calculated?

Your score is based on the information in your credit report, which provides lenders with your credit history and how you have handled credit in the past. Credit scoring models typically look for late or missed payments, how much you owed and how often it happened.

Additionally, every time you take out any kind of credit or loan through a formal institution, the lender will disclose that information to credit bureaus. These bureaus will then compile it and use it to create your credit report.

It’s worth knowing that you don’t have a universal ‘credit score’ as such. That’s because each credit bureau calculates your score differently.

For example, Experian calculates your score out of 999, Equifax’s score is out of 700 and TransUnion gives you a score out of 710.

However, since all of the bureaus base their scores on your financial history, you are likely to fall into the same rating category (e.g. good, fair or poor) with all of them. 

Why does your credit score matter?

If you don’t have a good credit score, then chances are you’ll be overlooked for the best credit cards, loans and mortgages. This means that you’ll have to pay more to borrow in order to compensate lenders for the higher risk of giving you access to credit.

As a result, protecting your credit score and using borrowed money responsibility is vital if you want to build up trust with lenders. The good news is that there are ways to improve your credit score over time.

How can you manage your credit score?

By law, you are entitled to a free copy of your statutory credit report from each of the three credit reference agencies. This contains basic information about you, including any credit accounts you have, any missed payments and defaults, and electoral roll information.

However, this report doesn’t include your credit score. To check your credit score for free, you’ll need to visit the website of your chosen credit bureau and sign up for an account. 

When you sign up, you will have access to all of the information held by the three credit reporting agencies, including your credit score, for 30 days. After that, you may have to pay a monthly fee.

If you have no credit history or a poor credit score, there are cards available that can help you build your score, making you more attractive to lenders. Check out our guide to credit cards for bad credit.

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