Lenders and financial institutions use credit scores as an indication to whether you might be a reliable borrower. It affects how willing they would be to lend you money, so it’s an important aspect of your financial wellbeing.
What you'll learn:
- What is a credit score?
- What is the purpose of a credit report?
- What does my credit report contain?
- What is the average credit score in the UK?
- Why is my credit score important?
- How are credit scores calculated?
- How do lenders use credit score information?
- How do I find out my credit score?
- How you can monitor your credit score
- How often should I look at my credit report?
- Tips to improve credit score
- Does applying for an overdraft affect your credit score?
- Do overdrafts affect your credit score?
- Will changing my overdraft affect my credit rating?
- Do payday loans affect my credit score?
- Will a payday loan show up on my credit report?
- How long do payday loans stay on my credit report?
- Can I get a payday loan with poor credit history?
- How to keep your credit score up with payday loans
What is a credit score?
Essentially, a credit score is a three-digit number that represents how reliable you are at borrowing and repaying your bills. The typical credit score range for the UK is between 300 and 850, but this can go all the way up to 999. The rule of thumb is the higher your credit score, the better.
There are three main credit reference agencies (CRAs): TransUnion, Equifax and Experian. These are agencies that compile and assess your credit history to calculate your score.
TransUnion is a global consumer credit reporting agency. Established over 50 years ago, TransUnion is very experienced in collating personal information in over 30 countries.
Equifax has more than 120 years of experience in the industry and has one of the biggest sources of consumer and business data in the UK. It operates (or has investments) in 25 countries worldwide.
With more than 125 years of experience, Experian is the UK’s longest-running credit score. It operates in 37 countries around the world.
What is the purpose of a credit report?
A credit report is compiled by each of the UK’s three CRAs. These agencies get their information from a variety of sources. Personal details such as your address are often provided by the Royal Mail or taken from the electoral roll, showing whether you currently live at the address supplied. Data is also sourced from Companies House, banks, building societies and other financial institutions, as well as Registry Trust Limited and many more.
When you apply to borrow money, the lender will ask at least one CRA to see your credit report. Each CRA uses different scales to generate a credit score based on the report, which can help the lender decide whether to approve or reject your finance application. This is the main purpose of a credit report, so it’s important to check it and make sure everything is correct and looking good to boost your application’s chances of approval.
What does my credit report contain?
Your credit report holds information about your financial history. The most important elements are your credit accounts. These include bank and credit card accounts, along with outstanding loan arrangements and utility company debts, showing whether repayments have been made on time and in full. Any missed or late payments and defaults on these credit accounts will stay on your credit report for at least six years.
Personal information such as your salary, religion and criminal record are not contained in your credit report.
Information that is held includes:
- Anyone financially linked to you (via joint credit, for example).
- Public record information such as County Court Judgements (CCJs), bankruptcies, house repossessions and individual voluntary arrangements (IVAs). These will remain on your credit report for at least six years.
- Your current account provider and details of any overdrafts.
- If you’re on the electoral register.
- Current and previous addresses.
- If you’ve committed fraud or someone has stolen your identity.
What is the average credit score in the UK?
All three credit reporting agencies use different methods to calculate credit scores, so yours may vary depending on which you chose. The average credit scores in the UK are:
- Between 720 and 780 according to TransUnion
- 383 according to Equifax
- 759 according to Experian
Why is my credit score important?
A credit score is important as it used by lenders to determine whether you are a reliable borrower. It can therefore hugely impact your ability to be accepted for different forms of credit. Someone with a positive credit score will likely be deemed a safer option than someone without.
Not only are you more likely to be accepted for credit in the future, but a positive credit score you should allow you to receive more favourable terms and rates. Having an up-to-date idea of your credit situation by regularly checking your credit score is therefore advisable, this way you know if any work needs doing to improve it before applying for finance. Making improvements to your financial situation should put you in the best position to be accepted and receive favourable terms.
How are credit scores calculated?
Credit scores are calculated using specific formulas and complex calculations. Your credit score takes the following into account:
- Your payment history
- How many credit accounts you have (and the types)
- Your used credit versus your available credit balance
- Duration of your credit history
- Electoral role history
- County Court Judgement Information
How do lenders use credit score information?
Lenders will typically use your credit score information in one of two ways:
Soft credit checks
A soft credit check is like an entry-level check that companies perform to assess how likely they would be to lend you money. It won’t affect your credit score and shouldn’t impact any credit you may apply for later.
It’s only visible to you and can provide you with an indication of where you are currently, as well as useful feedback going forwards.
Hard credit checks
A hard credit check is a detailed review of your credit report. The main difference with this check is that every hard check is recorded on your report. This means that any company can see you’ve applied for credit, and it may affect your credit score. Find out more about the difference between hard and soft credit checks in our hard vs soft credit checks guide.
How do I find out my credit score?
Every CRA must provide you with one copy of your credit report for free. This can be accessed online, or you can request a written copy by contacting each of them:
TransUnion offers free access to your credit report for life, but it can be worth applying for a copy from all three. There is a lot of overlap between the CRAs, but they do hold some different information. Certain lenders will only check with one CRA too, so having a full understanding of your score with each is best practice.
A good credit score doesn’t always mean you will be accepted for finance, but it should improve your chances and the rates and terms offered.
How you can monitor your credit score
There are a few ways to monitor your credit score to keep track of your financial health.
You may request a free copy of your credit report every 12 months from each CRA.
Equifax have an option to get six free credit reports throughout the year.
There are also monthly report options. The Equifax Core Credit option allows people to keep track of their credit score on a month-to-month basis.
Some credit agencies have online platforms and apps where you can be notified regularly about your current credit score. This may be in the form of an email or within the application itself.
How often should I look at my credit report?
If you haven’t looked at your credit report in a while (or ever), it’s a good idea to check it as soon as possible. This will give you a good overview of your current situation, highlighting any errors and areas for improvement to increase your chances for future finance applications. If you’re planning to apply for any type of credit such as a mortgage, secured loan or even a new mobile phone contract, you should take a look beforehand.
You can check your credit report as often as you like and it won’t influence your credit score, leaving just a soft search which is only visible by you. Regularly checking will help you spot any errors early on and get them amended. If your credit score is bad, you can put a plan of action in place to improve it before making an application. Otherwise, you may be refused credit, which will show up on your credit report and further deteriorate your credit score.
Tips to improve credit score
Here are some top tips on how to get a better credit score:
1. Keep your details up to date
Ensure all your active debit and credit cards are registered to your current name and address. To help keep your credit score up to date, make a list of your outstanding debts and contact lenders to confirm your details.
2. Check your credit file
Looking through your credit file will highlight any outstanding lenders as well as any debts that are incorrectly registered in your name. By keeping lenders up to date on which debts are outstanding, you will improve your credit history.
3. Register to vote
Getting on the electoral roll makes it easier for lenders to confirm your identity and address. Not only does registering make you eligible for voting in elections and referendums, it’s also one of the quickest ways to improve your credit score.
4. Prioritise your debts
It’s crucial to identify the most important loans to repay if you have more than one debt that you are falling behind on. Priority debts could include mortgage/rent payments or utility bills. These should be paid off as soon as possible.
5. Open new credit accounts
Opening a new credit account such as a credit card can improve your credit rating. Remember to consistently stick to your repayment schedule and exercise caution, as opening too many accounts could be seen negatively by lenders.
6. Arrange automatic payments
Prompt repayments significantly improve credit scores. Set up automatic repayments so they are initiated before their due date. This demonstrates to prospective lenders that you are financially savvy and can make regular commitments.
7. Keep your oldest card active
You may be tempted to dispose of existing credit card accounts once they’ve been paid off. However, keeping your oldest credit card highlights your ability to make regular repayments over a long period which reflects positively on your credit score.
8. Restore your payment record
Improve your credit score by making regular, small purchases on your credit card, such as your food shopping. If you make the repayments on time, your credit score should improve after six months of regular, reliable usage.
9. Stick to your credit limit
Lenders will not take kindly to evidence of you spending more than you earn between monthly pay cheques. This may be seen as an inability to make regular loan repayments comfortably.
10. Borrow less than your credit card limit allows
Potential lenders will view how much you have borrowed on your credit card in proportion to what the limit allows. You can improve your credit rating by sticking within 25% of your monthly credit card limit.
Does applying for an overdraft affect your credit score?
Your credit report will have details about the types of accounts you have handled, including accounts with overdrafts. If you apply for a current account that has an overdraft facility, potential banks will see this and conduct a hard credit check.
If you apply for several overdraft accounts, this suggests to potential banks that you are wanting to borrow a lot, which can make your credit score dip.
Do overdrafts affect your credit score?
Arranged overdrafts do not have to affect your credit score. In fact, you can keep your score high by paying back your overdraft each month, and only using it occasionally.
By paying an overdraft back regularly, your debt may not appear on your credit report. This is because credit report data is usually gathered once a month, meaning by the time your bank or financial institution sends your information to credit agencies, you have already paid your overdraft and your balance has returned to £0 or above. This way credit agencies don’t see your temporary overdraft use and your credit score can remain high.
However, late payments or unarranged overdrafts can affect your credit score. This is because late payments signal to potential banks that you may be unreliable or are financially unstable.
Will changing my overdraft affect my credit rating?
If you think you may go past your arranged limit, for example if you’re moving house or buying a car, you might want to change your overdraft.
Increasing your overdraft
When increasing your overdraft limit, your bank will carry out a hard search on your credit report. Hard checks conducted on your credit report will lower your credit score, so doing anything that results in a hard check isn’t ideal.
However, it’s better to increase your overdraft limit rather than spend past your current limit.
Decreasing your overdraft
The less you borrow, the better your credit score. Therefore, if you have a lower overdraft limit, you will be able to borrow less and your score should improve.
Do payday loans affect my credit score?
If you cover your repayments in full and on time, payday loans shouldn’t have a negative effect on your credit score as long as you don’t keep applying for payday loans too frequently.
Will a payday loan show up on my credit report?
Just like any other borrowing, payday loans will appear on your credit report. You might find that other lenders give future applications greater scrutiny because you’ve borrowed from a payday lender in the past. Lenders may view your credit report negatively if it shows you’ve taken out payday loans regularly, which could limit what products and rates they’re willing to offer you.
How long do payday loans stay on my credit report?
A payday loan could show on your credit report for up to six years after your account has been paid off. Whenever you apply to borrow money, lenders will search your credit report before they offer you a loan. They then use different credit reference agencies to check your details, with different scoring systems in place across them all. However, the details they record are likely to be similar.
Can I get a payday loan with poor credit history?
Typically, payday loans are designed to meet the needs of borrowers with a poor credit history. This means, even if you have a low credit score, you may be able to borrow from a payday lender. Remember, every lender is different and will consider each application independently, so there’s no guarantee that your application will be accepted.
How to keep your credit score up with payday loans
There are many examples of how payday loans affect credit ratings in a positive way. Taking out a payday loan can help build credit and boost your credit score — but only when it’s managed carefully. There are a few ways to ease your financial situation by maintaining or improving your credit score:
Be sure you can pay it back in full and on time
If you can’t pay your loan back on time, the lender may offer you an extension. However, borrowing money at the kind of rates offered on payday loans, even over a relatively short term, can add unnecessary interest and stress.
Don’t take out too many payday loans
Taking out lots of payday loans will appear on your credit report, which could act as a red flag to other lenders. Plus, if you take out multiple loans at once, you may find your repayments become more challenging.
Don’t make more than one application at a time
When a lender accesses your credit report, it leaves a mark that other lenders can see. Though these might take a while to appear, lenders are likely to be suspicious of someone who’s applying for payday loans through multiple lenders at the same time.
Payday loans can be useful if you need cash in your bank quickly, and when you’re confident you can pay it back on time and in full. But if you can’t manage your borrowing, things can snowball quickly.
Always ensure you’ve considered all the available options before you apply for a payday loan. Get financial advice from an independent source if you’re not sure.
How to improve credit score immediately?
There isn’t an immediate way of improving your credit score. However, there are a few things that you can do to increase your score over time. These include:
- Checking and correcting any errors on your report
- Add yourself to the electoral register
- Pay your bills and credit payments on time
- Ensure all your details are up to date
- Keep your credit utilisation low
What credit score is needed to buy a car?
There isn’t a minimum credit score that you need to have to buy a car on finance. However, you can be more likely to be accepted for the car loan if you have a high credit score as this shows lenders that you are dependable. In some cases, it is possible to get a loan with a poor credit score, but you may face high interest rates.
How long does it take to increase your credit score?
There is no one-size-fits-all answer. Depending on your credit score and your ability to get back on track, it could take from one month to several years to improve your credit score. If you are finding it difficult to stay on track with your repayments, consider a debt consolidation loan to help make repayments more manageable.
Does paying off an overdraft increase your credit score?
Having an overdraft does not impact on your credit score directly. If you are overdrawn within your agreed overdraft limit and are making regular repayments, this can in fact improve your credit score. An unauthorised overdraft exceeding your agreed overdraft limit will be reflected on your credit score as an unpaid debt. Lenders may question your financial trustworthiness for this reason.
Will my credit score improve when defaults drop off?
Defaults are considered a red flag to lenders and will have a negative impact on your credit score. Your credit report will show the default for six years after the date it was registered. The default will remain on your credit report even if you settle the debt within six years. After six years, your credit report will update and your credit score will increase.
What impact do student overdrafts have on credit scores?
Student overdrafts work in the same way as a regular overdraft, meaning they aren’t viewed any differently by credit reference agencies. It’s important to remember that while student overdrafts are often advertised as interest free, you may have to start paying interest on your overdraft once you leave university.
Do overdrafts affect getting a mortgage?
Well-managed overdrafts will be shown in your credit report, which helps companies decide whether you meet their criteria for a mortgage. The less debt you have from an overdraft, the better your credit report and credit score will be.
How do I get rid of an overdraft?
To get rid of an overdraft, it’s useful to plan how to manage your money each month so you start paying it off. Create a budgeting plan to keep track of your payments, and look for ways to cut down on any unnecessary expenses you could otherwise put towards your overdraft.
Check out our Know How section for more tips on boosting your credit score.