UK Credit Scoring Explained


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By Crispin Bateman

on Monday 21 January 2019


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Maintaining a good credit score is essential if you want to have access to many of the financial products on offer today.

From mobile phone contracts to mortgages, every little piece of lending ties back to the credit score, but how does a credit score work in the UK? Are all credit checks the same? What is a multi-agency credit report?

In this article, we delve deep into the world of credit scoring, how you can keep on top of it and exactly why credit reports matter.

Article contents:

What is a credit check in the UK?

What is a good credit score?

Does my credit score affect my chances of a loan or credit card?

How long do defaults stay on your credit report?

How long do credit checks take?

What information is needed for a credit check in the UK?

Is credit rating linked to address?

Does doing a credit check affect my credit score?

Can I check my credit score for free?

What information is included in a credit report?

How far back can I get my credit history?

How do I improve my credit score?

 

What is a credit check in the UK, and how does it affect me?

Personal finance in the UK revolves around the credit score check. It is a means for any potential borrower to get a glimpse (or, in some cases, a detailed report) regarding your finance history, and they use this to determine whether they want to do business with you or not.

It’s made as simple as possible, all the data put into a pot and stirred around until a single value comes out: your credit score.

And that’s enough for most companies – high credit score means they are happy to lend you money, and a low credit score results in a rejection of your application.

Of course, as we shall see, it’s actually a little more complicated than that, but at its core that’s the system. As to how it affects you? Well, that all depends on whether you want to borrow something from someone.

What is a good credit score?

If there was only one credit scoring agency, then it would be possible to give a simple answer to this question - however the UK has three main credit rating agencies (CRA) and each of them has slightly different data, and a different way to represent it.

Experian

Experian are one of the big CRAs and have a huge business supplying financial data to businesses across the world. In terms of your personal finance, they will issue a score between 1 and 1000, where anything below 560 is considered ‘very poor’ and the national average sits somewhere close to the mid-700s. For an excellent rating you are going to need a score very close to the top – only 961 and up gets this impressive label.

Equifax

Where Experian came into business at the tail end of the 20th Century, Equifax have been doing what they do since the end of the 1800s! This global firm is well-trusted to provide accurate credit reports and has their own scoring system which ranges from 1 to 700 with the average around 380. Here, ‘very poor’ means 279 or below and ‘excellent’ starts at a mere 466.

TransUnion / CallCredit

Once known as CallCredit, TransUnion are the smallest of the main three CRAs and are used a little less than both Equifax and Experian. One notable difference is the length of time CallCredit seem to hold data, with information continuing to be made available after a decade has passed, where both Equifax and Experian tend to concentrate on a shorter period. This doesn’t tend to matter for your overall score but can provide a larger insight into your personal finance history if you look it up yourself. Here you get a score out of 710, with ‘very poor’ being considered anything below 550, and ‘excellent’ reserved for those of 628 and up.

Crediva

Somewhat different to the main three, Crediva’s checks are of a unique scope, looking at your status politically and regarding the electoral roll rather than looking at prior lending history. It is worth considering as some lenders may use it but is generally outside the scope of standard credit scoring.

Multi-agency credit report

To understand a full credit report, many lenders will rely on a credit check made up of data from all three big CRAs, as well as incorporating information from Crediva.

One such service available for your personal use is Check My File, who provide an extensive amount of data cross-referenced across all the CRAs and presented in an easy-to-understand fashion.

Through a multi-agency credit report, your rating is normalised to five bands scored out of 1000. Here, the UK average comes in at 662, with below 450 regarded as ‘very poor’ and 900-999 representing the top tier.

How does my credit score affect my chances of a loan or credit card?

Though you may think that a poor credit rating immediately puts you out of the running for a loan, the truth is somewhat more wide-ranging.

There are many companies that will offer loans or credit cards to people with bad credit – especially credit cards where there are several cards specifically designed for use by those with poor credit scores.

These cards are not without their costs. Typically, you will have to suffer:

  • Low initial credit balance – where someone with a ‘good’ credit might be offered a starting level of £2,000, those with poor credit may only be able to gain a maximum amount of £1,000 or even less.

  • High interest and fees – in order to offer their risk in lending someone with poor credit money, credit card companies will want a high return.

  • Inferior support – some of the smaller companies who will lend to those with bad credit do not have the infrastructure that larger banks have, meaning their online or mobile systems may be less encompassing, plus you could have longer hold times when calling by phone.

  • Shorter grace periods – if you miss a payment, expect to be chased without delay!

Like credit cards, getting a loan with poor credit is possible but the amounts you will be offered are typically far lower and the interest rate far higher. Where a good unsecured personal loan rate hovers around the 5% range, for those with low credit scores interest rates of 29% and up are not unlikely.

How long do defaults stay on your credit report in the UK? Do debts go away?

A default is when you have failed to make a payment on a debt and will remain on your credit record for six years, although old defaults that do still appear tend to be ignored by many lenders.

A debt never truly goes away until it is paid, or you have either an individual voluntary arrangement (IVA) or bankruptcy that deals with it. There is, however, a piece of legislation called ‘statue barred’ which prevents a lender from chasing a debt after six years.

How long do credit checks take?

Provided you can disclose all the necessary information, a credit check can be done in mere minutes by most lending agencies.

What information is needed for a credit check in the UK?

Performing a credit check is simply a case of confirming your identity and then requesting the information from a credit reference agency. In the UK you will need to know:

  • Your full name, plus any changes of name that have happened

  • Your date of birth

  • Your last three years of addresses

Some CRAs will request further details, such as your current account details or a debit card, and all lenders looking to do a check will want to see some photographic ID or other proof that you are who you say you are.

Is credit rating linked to address?

There is a long-standing myth that if you share a house with someone who has poor credit or move in to somewhere where the previous occupant had defaulted on their accounts that it will affect your credit rating. This isn’t true.

Your address is important for confirming your identity and linking you to other accounts in your name at that property, but you are not affected by other people living there unless you are otherwise financially linked (for example, you have a joint bank account).

One important factor is to make sure you are enrolled on the electoral roll, as this provides a strong additional positive check to your credit score.

Does doing a credit check affect my credit score?

There are four types of credit check that can be done:

  • Credit application – this occurs when you make a formal request for credit through a lender. Doing this will negatively affect your credit score as making a lot of requests for credit is seen as showing you to be desperate for money, and thus more of a risk. One or two credit application checks every few months will have little-to-no impact, but multiple applications every month will soon add up.

  • Audit searches – This happens when you look up your own credit score. It has no impact on your rating and isn’t seen by any lender.

  • Enquiry searches – These are ‘soft’ searches that are typically done in preparation for a full credit application. An example of enquiry searches occurs when you use a price comparison site for something like insurance – each company quoting will perform a soft enquiry search. Enquiry searches do not affect your credit rating.

  • Miscellaneous searches – Should there be a type of search that doesn’t fall under the previous three categories it will be marked as miscellaneous. This will not affect your rating.

Other than a full credit application, which can never be done without your express permission, searches on your credit file do not adversely affect your score.

Can I check my credit score for free?

With the advent of GDPR – the European data regulations, credit record agencies have had to open their doors a little more to allow you access to your own data.

This has led to a growth in sites dedicated to showing you your credit check, meaning that you can be on the same understanding as the lenders when it comes to knowing your financial history.

What information is included in a credit report?

When a lending agency checks your credit status, they will be looking for specific things to suit their criteria. For example, a mobile phone company may be willing to just check you have a suitable score to get a contract phone, where a bank considering an unsecured loan will dig deeper, checking your current level of credit to see how stretched you are and to determine whether you can afford the regular monthly payments the loan is set to.

When you check your report yourself on a site like Check My File, you can see all this data and much more. Information like:

  • The list of accounts you have that count towards improving (or potentially harming) your credit rating.

  • A graph detailing your current level of credit and how it has fluctuated over recent months and years.

  • Any people who you are tied to financially.

  • A list of your past addresses and details of what accounts were tied to them.

  • How you are considered in terms of a credit risk.

  • How your credit compares to a national average.

  • A list of previous loans and completed accounts you have had.

  • Any defaults or other missed payments.

It is worth noting that the credit reports are updated monthly, so there is little point in checking your details daily as little will change until the next period.

How far back can I get my credit history?

As your loans and other credit history remains on record for six years, when you check your credit score for free on Check My File, you can see that full record.

Additionally, sundry information such as past addresses might go back even further.

Ultimately, even the most accurate credit score site is limited by the data passed to it from the CRAs, but if they have kept a record of it, then you can see it!

How do I improve my credit score?

For helpful advice on improving your credit rating, look to our articles on personal finance here on Compare UK Quotes.

We are here to help you navigate the minefield of personal finance and to give you all the support and advice needed to maintain a stable credit score throughout your adult life. If you do not find the information you need in our library of articles, then give one of our expert advisors a call or fill in our contact form to have one of our team call you back at a time more convenient to you.

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