It’s a mysterious number attached to your name that many of us know little about. But your credit score can have a huge impact on your life.
Every time you apply for any type of credit, the company lending it to you will check your credit record.
Your rating is one of the primary factors they take into account.
If your credit score number is too low, you could be denied a credit card, mortgage or even a mobile phone contract.
By contrast, a higher score means you’re not only more likely to be accepted, you may also qualify for a better deal.
But who decides what score you have and how it is calculated?
The scoring system used by different credit reference agencies has been cloaked in secrecy for years. Traditionally, they have given out only vague advice such as avoiding anything that makes you look like a risk.
So we asked the three major credit reference agencies who hold your information — Experian, Equifax and Callcredit — to come clean on how they calculate your score.
HOW CREDIT AGENCIES CALCULATE YOUR SCORE
Each agency uses a different scale. Experian’s ranges from 0 to 999, Equifax from 0 to 700 and Callcredit — which runs the free Noddle credit report service — from 0 to 710.
Being in the ‘fair’ credit-score range (721-880 with Experian, 380-419 with Equifax or 566-603 with Callcredit) means someone is likely to be offered credit by some lenders, but not all.
They will tend not to get the best deals and may be offered low credit limits. Experian says its average score is 780, which is in the ‘fair’ range.
Increasing your score to ‘excellent’ (961 or above with Experian, 466 and above with Equifax, or 628 and above with Callcredit) means you should get accepted by almost all lenders and qualify for the best rates on loans and mortgages and the highest credit card limits.
But if your score drops into the ‘poor’ range (720 or below with Experian, 379 or below with Equifax, 565 or below with Callcredit), you are likely to be rejected by most lenders or be offered only the worst deals.
WIN POINTS WITH A CREDIT CARD
Experian was by far the most transparent in revealing what affects its scores.
Your credit cards play a major role. Being given a credit limit of more than £5,000 can increase your score by around 20 points. Clearing the balance can add 60 points and spending less than 30 pc of the card’s limit is worth an extra 90 points.
Card tricks: Being given a credit limit of more than £5,000 can increase your score by around 20 points
Being given a low limit of £250 or below can knock off 40 points; racking up £15,000 of debt on a card takes off 50 points; and using more than 90 per cent of the credit limit — even if you repay it monthly — also cuts 50 points from your score.
Missing a payment costs around 130 points on the Experian system and around 40 points on the Callcredit system.
Callcredit says the amount lost will vary by individual. For example, habitual late payers could lose fewer points per missed payment than someone who is missing one for the first time.
‘The difference here is that a significant behavioural change could indicate financial difficulties,’ Callcredit says.
WHEN LOYALTY REALLY DOES PAY
Warning: Serious financial problems such as defaulting on a debt or being issued with a county court judgment (CCJ) can damage your score
James Jones, of Experian, says all the data about how you borrow and repay credit ‘work in combination’ to produce your score. So avoid doing too many activities at once, such as switching several accounts in quick succession.
Under Experian’s system, opening any form of credit account — including getting a new mobile phone contract, switching utility supplier or signing up to pay car insurance premiums monthly — within six months of applying for another credit account could lose you 40 points.
Having no new accounts opened for six months can boost your score 50 points.
Having too few accounts is a problem, though. Customers with only one credit account opened within the past 18 months are 75 points worse off than those with more accounts, typically.
Lenders like stability, so keeping the same address, job and bank for several years will boost your score, as will registering on the electoral roll, which can add 50 Experian points.
Serious financial problems such as defaulting on a debt or being issued with a county court judgment (CCJ) can damage your score.
Experian says a CCJ will take off around 250 points, while defaulting will knock off around 350 points. A note remains on your file for six years.
Bear in mind that each lender has its own criteria for deciding who it lends to and will use other information — such as whether you have a history with the company. So credit scores are only one factor when making a decision.
If you are refused credit, ask the lender why.
If they blame your credit score, the law says you can appeal for them to consider your case on an individual basis, instead of relying on an automated system which is more likely to reject you.
Mr Jones, of Experian, says: ‘If there is negative information that is accurate but occurred due to a good reason, such as you missing a payment while in hospital, ask the agency to add an explanatory note to your credit report, which future lenders then have to read.’
An Equifax spokesman says: ‘If you don’t meet the criteria of one lender, you may still be able to get credit from someone else.’
Equifax failed to provide details on how much it adds and subtracts in different situations.
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