What Is A Credit Score?

Essentially a credit score is a 3-digit number that measures how reliable you are at paying bills on time, whether you are repaying borrowed money, paying credit card bills or spreading out the costs on a payment. In this article, we look at what a credit score is, how it works and most importantly, why credit score matters.

Why Is Credit Score Important?

Credit scores represent your credit risk, and how likely you are to pay bills on time. Your credit score is important as many companies or creditors and lenders use it as a factor in approving you for certain applications. For example, if you apply to take a loan, lenders will look at your credit score before making a decision, and it may also help them decide how much to offer you. Your credit score can also determine the size of an initial deposit and credit agreements for smartphones, services or utilities or even when renting or buying a flat or house.

Those with a higher credit score may also receive more favourable credit terms, which could mean lower payments and less interest over time. Having a good credit score essentially shows that you are good with money and can be trusted, and are more likely to get approved for credit cards, loans, mortgages and more.

Related: What Credit Score Do You Need To Get a Mortgage?

How Does Credit Scoring Work?

Credit scores are calculated using a point system made up of 3-digit numbers based on what’s in your credit reports. This in turn reflects how you’ve managed debts and bills in the past. For example, the more you pay your bills on time, the higher your score is. But a history of missed or late payments will harm your credit score.

Although credit scores are usually calculated from borrowed money, as this is easiest for lenders to access the risk of lending to you, you don’t have to take loans in order to have a good credit score. Credit scoring can also be calculated by other service providers such as any accounts you hold and how they are managed, mortgages, credit cards, store cards, contracts and household bills such as rent, electrics, mobile phone, TV subscriptions and more. Other factors which affect your credit score include court records such as bankruptcy and the electoral register. For more check out our articles on What Affects Credit Score and The Electoral Role and Credit Score.

Credit Score Range in the UK

In the UK there are 3 different credit reference agencies (CRAs), they are essentially responsible for holding your financial history data, or credit report, which is used to generate a credit score. The 3 CRAs are Experian, Equifax and TransUnion, and each agency has its own credit scoring system. So, depending on which one you choose, the exact credit score number may vary, but you will likely fall within the same category across the board.

The 3-digit number is the credit score, which ranges from 0 to as high as 999 with category names such as ‘very poor’ to ‘excellent’. Since this differs between the agencies the credit score range is generally similar to:

  • Excellent: 800-850 (or above)
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 300-579

And anything below poor would be considered ‘very poor’. Checking your credit score is free and won’t affect your credit score, but if you fall on the lower end, there are various ways you can improve your credit score.

The type of credit score will also vary depending on the industry, for example when buying a car, an auto lender may use a credit score which places more emphasis on your auto loan payment history. And some lenders may use one or two of the above CRAs or even a blended credit score from all three CRAs.

Credit Score and Loans

If you’re worried about your credit score, remember that there is no ‘magic number’ which means that you will or won’t be approved for certain things like loans. And everyone’s financial situations are unique, lenders and creditors will see that and some may even have their own criteria when it comes to granting credit.

If you’re looking at borrowing money or worried if your score affects your ability to do so, we’ve got some tips for getting a loan, or read our article for getting a loan with bad credit. At Sunny we offer a wide range of loans for those with bad credit, meaning no matter what your score is our lenders can still accept you.