A good credit score is the foundation of a brighter future. With a good credit score you can make better financial decisions, have more financial options available, and when you do need to borrow money you will pay less in interest.
A good credit score can influence your ability to get approved for credit cards, cash loans, car loans, mortgages, mobile contracts and more. In short, good credit is key to achieving your financial goals.
But what is your credit score? What is considered a good credit score? How is it determined? And how much does it really matter?
What is your credit score?
Your credit score is a three-digit number that indicates how reliable you are at borrowing and repaying money. When you apply to borrow money, lenders will look at your credit score before deciding whether to accept your application and deciding how much interest to charge.
The three top credit reference agencies in the UK are Equifax, Experian and TransUnion, with each having a different range for their reported credit scores. Equifax has a score range from 0 to 1,000, Experian scores from 0 to 999 and TransUnion scores from 0 to 710. Each of the agencies has their own system for calculating your credit rating, making it tricky to find a universal average credit score in the UK.
Don’t know your credit score? Get yours today from Experian, Equifax, or Transunion.
What is considered a good credit score?
Credit scores fall into 5 categories: excellent, good, fair, poor and very poor. While the agencies all take the same basic factors into consideration when calculating your score, not all credit products report to all the credit agencies, so the category that your score falls into may differ between agencies. Below are the bands that Experian uses to determine which category your score would fall into:
|
Experian |
|
|
Excellent Credit Score |
961-999 |
|
Good Credit Score |
881-960 |
|
Fair Credit Score |
721-880 |
|
Poor Credit Score |
561-720 |
|
Very Poor Credit Score |
0-560 |
It can take many years of disciplined financial behaviour to achieve an excellent credit score, however good credit scores are achievable with several months of solid credit building under your belt. The UK’s average Experian score reached 797 (Fair) in September 2021, up from 792 in 2020 and 776 in 2019.
How is your credit score determined?
All the leading credit rating agencies rely on similar criteria for deciding your credit score. The most important determining factor is your credit history. That is, how have you handled credit that has been provided to you in the past? Did you make your repayments on time or did you miss some payments?
Your credit history is like your financial CV and building a solid credit history is one of the best ways to get a good credit score. If you have been borrowing money and paying it back successfully for many years, this will be reflected in a higher credit score. Having little or no credit history results in a lower credit score and it becomes difficult for companies to assess your ability to make repayments on the money you borrow. Lenders want proof that you will pay back what you borrow. Your credit history, and resulting higher credit score is proof.
Take the scenario of an employer who has two candidates for a job. In every aspect they are identical except one has 10 years of experience and is demanding a higher salary, and the other has 6 months experience but would not have to be paid as much. Do you go with experience and proven ability, but pay more for it, or take a risk on the less experienced candidate and save the company some money? It’s similar with lenders when they review your credit history. If a lender sees you have a long history of making on-time credit repayments, you are more likely to a) get approved for credit and b) be offered a lower interest rate. It’s true, the lender will not make as much in interest payments, however the loan is safe, and it’s almost guaranteed that the amount borrowed will be repaid. Lending to someone with a lower credit score and perhaps a more sporadic history of making payments on time is a risk, one that is offset by charging a higher interest rate.
In addition to credit history, credit utilisation is an important factor that can contribute to a good credit score. Credit utilisation is the percentage you use of the credit you have available to you across all sources of credit, not just one card. For example, you have two credit cards. One has a limit of £1,000 and your balance is £900. The other card has a limit of £2,000 but you haven’t used it yet. On the first card, your utilisation rate is 90%, however, across all sources of credit it’s only 30%. Usually, a lower percentage will be seen positively by lenders, and will increase your credit score as a result. Try and keep your credit utilisation across all sources of credit below 30%.
Other factors that can also have a negative impact on your credit score include:
- Having a joint account, or co-signing on a credit product, with someone with a bad credit record
- Bankruptcies and insolvencies
- Making too many credit applications in a short space of time
- Errors or fraudulent activity on your credit report that’s not been detected
Even if you have a good credit score, there are factors that can impact your chances of getting approved when you apply for credit:
- Not registering to vote at your current address. Lenders use the electoral register to help confirm your identity when you are applying for credit. If you're not registered, it could delay your application or even result in your application being turned down.
- Moving house too often can make you look less stable, which might discourage some lenders from giving you credit. Lenders like to see stability in important areas of your life.
- Frequently withdrawing cash from your credit card can be perceived as a red flag by potential lenders as they may assume that you’re relying on credit card cash withdrawals to cover everyday purchases.
Contrary to what people may think, your salary has no direct impact on your credit score. A good credit score reflects your ability to make repayments on the money you borrow, not how much you earn.
How much does your credit score really matter?
A good credit score means companies see you as a lower risk. Not only will your credit score determine if you get accepted for a loan or a credit card, it can also impact the credit limits you are offered and the interest rate you can access. Depending on your score, the interest rate could save — or cost — you thousands of pounds over the years.
A good credit score makes borrowing money and getting access to loans and credit much easier, and cheaper. So, if you like to save money, working on improving your credit score is a smart financial move, and a secured card can help. Typically secured cards have low spending limits and high interest rates. However, if used responsibly, they can build your score over time.
The Score Mastercard(R) by DND is one secured card that does not charge interest on purchases, plus it gives you 1% cashback on all purchases and 1% interest on your security deposit!
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