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- Do I need a good credit score to borrow money?
If you’re looking to borrow money – through a loan, mortgage or credit card – then you’ll want to make sure your credit score is in tip-top shape.
Getting (and keeping) a good credit score is vital if you want to be accepted for the most competitive deals, because it’s the main thing lenders look at to see whether they can trust you to pay everything back on time.
This article will take you through how lenders decide whether or not to lend to you and the effects of good and bad credit scores. We’ll also point you towards some resources for checking your credit score and ways you might be able to improve it.
What is a credit score?
Your credit score is a number that lenders use to determine whether or not to offer you a loan. It’s calculated based on your history with borrowing and repaying money. If you’ve been good at repaying your loans and interest in the past then you’re likely to have a good credit score, which in turn will make it easier for you to get accepted for future loans, credit cards and even mortgage deals. The opposite is also true: if you’ve missed or been late with any repayments you’re likely to have a low credit score, which will make getting these deals much harder.
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What affects my credit score?
Your credit score is based on a wide range of different factors. Some things that affect your credit score include:
- Whether you pay off a personal loan on time
- Whether you regularly pay off your credit card on time and stay within your credit limit
- Whether you make your regular mortgage repayments on time
- Whether you’ve previously been accepted or rejected for deals from providers
- The number of cards or accounts that you use (having lots of accounts that you manage well can work in your favour – but having lots of accounts you don’t use or with outstanding payments can do the opposite)
- Whether or not you have been penalised for making early repayments
- The score of your financial connections, such as people you share a mortgage or bank accounts with
- Whether you’re on the electoral register (not being on it could damage your score)
How do lenders check my credit score?
Lenders will refer to one (or more) of the three main Credit Reference Agencies (CRAs) – Experian, Equifax and TransUnion (formerly CallCredit) – for a credit report including a score, but these agencies all use different scales and thresholds to decide whether your score is good or bad.
If one company determines that you have bad credit, however, it’s unlikely that another one is going to turn around and say it’s great. They’re all using the same data, after all. At the same time, there’s no magic number that guarantees you’re always going to be accepted for any deal.
Lenders will also refer to any information you’ve provided on your application form, as well as any previous financial interactions you might have had with them, such as accounts held or past applications. They might also take other signs of financial stability into account, such as what kind of job or income you have or how long you’ve been living in your current residence.
What is a good credit score?
A good credit score with Equifax would typically be over 531 out of 1,000, over 880 out of 999 with Experian, or 604 or above out of 710 with TransUnion. An excellent score for each of these agencies would be 811 and above with Equifax, 961 and above with Experian, and 628 and above with TransUnion.
What happens if I apply for a loan with a bad credit score?
If you apply for a loan with a poor credit score, you run the risk of getting a less favourable deal, or having your application refused. The former could mean a lower credit limit on a card, or higher interest rates on a loan. Lenders don’t have to give you the interest rates advertised on their websites. If you see them use a “representative APR”, for instance, that just means that at least 51% of people accepted get that rate – it’s not a guarantee that everyone will.
You could also just be rejected outright. This can be stressful, time-consuming and costly, especially if you need the money sooner rather than later.
It’s not as simple as getting rejected and just trying again until you succeed, either. Getting rejected for a loan, card or mortgage – whether because of a low credit score or any other reason – has the effect of hurting your credit score even more. For this reason, it’s not recommended to apply for multiple loans at once, because bad news from any of them could cause all the others to reject you too and really damage your score in the process.
Watch out for increased rates
Some lenders will regularly review all of their existing customers to see whether their credit scores have changed. If they find that yours has gone down and you’ve become riskier to them, they might try to increase your interest rates. It’s for this reason that keeping a good credit score is just as important as getting it in the first place.
If you’re unlucky, you might also face an interest rate increase when you haven’t done anything wrong. This could be because other people accepted for the same deal as you have not been so reliable with their repayments, which can drive rates up for everyone.
However, you do have certain rights in this situation. First and foremost, your lender legally has to tell you directly that your rate is going up. If it’s because of a risk they think you pose specifically, they have to tell you that too.
Unless the increase is because your interest rate is linked to the Bank of England base rate, or the end of a promotional period, they also have to allow you to reject the increase, close your account and repay the debt at the old rate of interest if you request this within 60 days of the increase. If this is on a credit card specifically, you could consider applying for a balance transfer credit card to transfer the debt and pay it off to your new provider at a 0% interest rate. Read our guide Balance transfer credit cards and personal loans compared for the latest deals on balance transfer credit cards.
The good news is that credit card companies will not increase your interest rate within the first 12 months as long as you follow their terms and conditions, and they won’t increase them more often than once every six months after that.
Where can I check my credit score?
There are three main credit scoring agencies in the UK – Experian, Equifax and TransUnion (formerly Callcredit). If you don’t want to pay to access your credit score, ClearScore offers a free credit checking service that accesses Equifax data. They also offer free identity protection that scans for stolen passwords, security problems and fraud defence tips.
Other options include MoneySuperMarket’s Credit Monitor tool, which enables you to check your credit score and report free of charge using data from TransUnion and offers free personalised tips to help it grow. Experian also has a free service that enables you to sign up and check your credit score with them and Totally Money offers a similar service using TransUnion data.
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How can I improve my credit score?
If you’re thinking about borrowing money but aren’t sure about the state of your credit score then it’s always worth checking it first. If it’s lower than you’d like, try not to worry – there are plenty of ways you can work towards improving it and boosting your odds of being accepted for future deals.
Check out our article Seven steps to improve your credit score to get started.
Oliver Maier writes about a diverse range of topics relating to personal finance with a focus on mortgage and insurance content, as well as everyday finance. Oliver graduated from the University of Warwick with a degree in English Literature and now lives in London. In his spare time he enjoys music, film, and the Guardian’s Quiptic crossword.
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