Your credit score and you: a guide to what makes up your credit score and how it is used

Nowadays, there are loads of ways to check and monitor your credit score. This is a good thing as it helps you to understand important information lenders use in their decision to accept or decline your application for a lending product. Plus it allows you to see if there are potential errors on your score and ask for any data being used incorrectly to be rectified.


However, it has meant that a lot of emphasis is placed on credit scores and sometimes this can create confusion and disappointment if your credit score appears to say one thing, but a lending decision seems to say another. Here we examine what a credit score is, the kind of information that goes into it and how it is used in lending decisions, as well as why your score might be different between Credit Reference Agencies. We also answer whether it is actually important to “manage” or try to “boost” your credit score, as well as good and bad ways to do this.


What is a credit score?

In the UK, there are three Credit Reference Agencies, Experian, Equifax and TransUnion (previously CallCredit), each of which compiles credit data about you to create a credit score. In short, your credit score reflects how much risk you represent to a lender as to how and whether you will pay your debt back. But lots of information is used to determine this.


What do the Credit Reference Agencies know about you?

For each agency to create your credit score, they use information about you that banks, building societies and other lenders, including utilities, mobile phone providers and payday lenders, have submitted about how much you have borrowed, how well you have kept up with payments, any payment arrangements (where you pay less than you have agreed to manage your debt), how much you pay off, and how you operate your account, such as how much you spend and taking out cash on credit cards. But not every lender submits all data to every Credit Reference Agency, so it’s difficult to know exactly which of these things go into a particular credit score.


In addition to this, any court records about debt, such as bankruptcies, CCJs (County Court Judgments) and IVAs (Individual Voluntary Arrangements) are also available to the credit reference agencies.


Finally, they combine all of this with information they hold themselves about when lenders have “hard” searched your file when you’ve applied for credit (see more below for the difference between a hard and soft search), electoral roll data, current and previous addresses you are associated with and people you have financial associations with, such as a joint account.


Because of that, it means each Credit Reference Agency can have a slightly different picture of you and each compiles your score in their own unique way. Plus each agency has different ranges, so 500 at one agency might mean pretty much the same thing as 700 at another. This is why ilumoni shows you your Equifax credit score in broad terms with a description of what it means.


One important thing to note is that there are rules about how long data can be held for. For example, a bankruptcy must be removed six years after the date it was declared, as long as you have been formally released from the debts – a discharge.


It’s also important to remember that Credit Reference Agencies only hold data that is relevant to how you operate your credit products, so they do not, for example, have a picture of your savings accounts.


How are credit scores used?

The first thing to understand is that the credit score is something that is mainly for you, summarising everything a Credit Reference Agency knows about you at a particular point in time.


When a Credit Reference Agency sends data to a lender who has searched your file, they give them more than just the score. This helps the lender to decide based on which things are most important to them in their decision. This isn’t something to worry about and can be a good thing, for example it helps to show lenders the difference between lower credit scores due to how someone uses credit or “thin files” where someone hasn’t much history (see more about this below).


Each lender has its own way of using the credit score information from credit reference agencies, and for each lender, each Credit Reference Agency has its own pros and cons. This includes really simple things such as how they match data in order to find your file. Increasingly lenders are choosing to use more than one of the agencies when they want to make a decision about whether to lend to you or not, as this can enhance the information that helps them to make their decision.


What they are trying to do is predict what will happen in future, based on what has happened in the past. This is based not just on you but their whole portfolio of customers and is a complex mathematical process. These processes are updated regularly and include factors that are not just about you as an applicant, such as how much risk they are willing to take at a particular point in time. For example, in an economic downturn, lenders may choose to lend less overall and only to customers with higher credit scores than they have done previously.


What’s more, your credit score is only part of the picture when a lender is deciding whether to lend to you or not. For most lenders, their initial decisions are automated, and take into account the things you tell them on your application, your credit score or scores and anything else they may know about you. For example, if you are an existing or previous customer, you will have what is known as a Behavioural Score, which looks at how you operate your accounts with that lender on a day to day basis and means they know a lot more about you than the credit score from a Credit Reference Agency alone. This can be helpful for people with “thin files” but it also means they are using information that may not be held by the credit reference agencies.


The credit application decision process

The process for deciding whether to accept or decline you for credit, and then how much a lender is prepared to lend to you begins with what is known as “policy decisions”. These may be simple things, such as whether you are over 18 and on the electoral roll. Or it could be something such as how long you have lived at your address or finding that you have previously been found to have committed fraud according to the CIFAS database.


If you do not “pass” this policy decision, the lender may decline your application, sometimes even before they search your Credit Reference Agency file, though information from your credit file also informs these decisions.


Assuming you have passed the policy decisions, a lender then uses the data you have provided on your application form, such as your income, the amount of credit you are applying for, home ownership, and more, combined with your Credit Reference Agency “score” to make their decision. As mentioned above, your score is not a singular number but a “block” of data about you. They may even consider how much money they expect to make by lending to you.


If your application cannot be assessed automatically, it may be passed to an underwriter. There are all sorts of reasons why you may be passed to an underwriter, such as not being able to match your address to a record at the Credit Reference Agency, or if you are borderline and they need further information about your income and outgoings. But being borderline does not necessarily mean an underwriter will assess your application, as this costs the lender a lot more to process your application, so they may just decline.


The final decision includes whether they will lend to you, how much they are prepared to lend to you and on what terms, for example over what period and at what interest rate. Remember that most advertised APRs are “representative”, which means 51% of people must be on that rate, however, if you appear to be a higher risk, you are may be offered a higher interest rate, lower credit limit or loan amount, or even a different product. You must pay close attention to the APR you are offered to understand how much your debt will cost you over time.


There are very strict regulations controlling this whole process to protect individuals, the financial services industry and economy as a whole. They ensure lenders are fair to customers, that they do not lend more than they can afford to overall, and to ensure they are not facilitating criminal activity.


There are also certain things that can never be used in a credit scoring process, such as gender, race or religion.


How to improve your chances of being accepted

The things that impact the decision, amount you can borrow, and interest rate include things like:

  1. your “debt to income ratio”, in other words, how much debt you currently have plus the borrowing you are asking for, as a proportion of your income. This helps to assess whether you can afford to pay back the debt you are asking for. Your salary is only available on your application form and is not stored by the credit reference agencies, but you must be honest about this or you are committing fraud.

  2. your total outgoings, again a measure of affordability that a lender may ask you to tell them about to make their decision. You may be asked to provide a lender with bank statements to prove this.

  3. how much you “live” in your overdraft. Remember, an overdraft is a debt you owe so if you are always “in the red” this will be a factor in a decision, if the information is available to the lender.

  4. how much of your credit limit you use. Similar to overdraft usage, if you are always near your credit limits, this will affect your chances of being accepted, so it’s important to demonstrate that you pay back what you have borrowed.


Telling a white lie on your credit application though is not a way to improve your chances of being accepted, as this is fraud. Lenders have sophisticated fraud checks and if you are found to have committed fraud or even look as though you may be committing fraud, this will have a significant impact on your ability to get credit and may lead to prosecution.


Should you try to boost your credit score?

There are certainly things you can do to help, but there is no silver bullet and the best thing you can do is make sure you are always doing things to put yourself in the best possible light. Not only is this relevant to whether you can get credit, it also matters when it comes to how much that credit will cost you overall.


The first thing to know what your credit score is and what it means at that particular Credit Reference Agency. That’s one of the reasons we show you your credit score straightaway on the ilumoni app. If you think your score is incorrect at any Credit Reference Agency, you can check the information they hold on you and get any errors corrected.


The basics

There are also some basic things you must do, such as registering on the electoral roll. If you are moving, make sure this is on your moving checklist – don’t wait for the annual letter. If you are not eligible to vote in the UK, you can provide proof of residency to each Credit Reference Agency. Also make sure you close old accounts at old addresses properly so there is no chance you look like you are living at a different address from the one on your application.


How you manage your debt

The best thing you can do, as a minimum, is to stay within the terms of your current lending. That means not missing payments or going over your agreed credit limits (e.g. on credit cards, store cards or overdrafts) without prior arrangement. This is referred to as being “delinquent” and even in “default” if your relationship with a lender has broken down completely. Being delinquent or in default will have a big impact on your score and not just in the short term. Withdrawing cash on your credit card will also have a significant negative impact on your score.


However, always paying only the minimum and carrying large balances for long periods of time, or constantly “topping up” your debt so you don’t seem to pay it down would typically result in a lower credit score. This is sometimes referred to as Persistent Debt. While you may be accepted for a credit application, it may be at a much higher interest rate.


At the other end of the scale, because some lenders make decisions based on how much money they will make, paying off your credit card in full every month or constant switching to 0% cards may mean they will decline you. BUT, that doesn’t mean you should carry balances unnecessarily, it’s just something to understand about the complexities of lending decisions. Using services that help you understand your likelihood of being accepted before you apply can help you here, such as the one available on ilumoni.


Other debt

If you have debt or available credit limits elsewhere, this is likely to affect whether another lender will accept your application and how they will offer you. If you have credit available elsewhere that you don’t want to use, it is likely to help if you close that account or reduce your limit. ilumoni will help you to pay off your debt as efficiently as possible so that when you need to borrow, you can do so in the best way at the best rates.


Financial associations

Having financial associations, usually joint accounts but it can be from joint names on bills, can mean your partner or housemates’ credit history can impact your score. You should not be “financially linked” by a shared utility bill unless you are clearly in a couple, but you don’t need the hassle of resolving this so take care about how you split and name bills in your household. Do remember though, if you are the named person on the bill, you are the party legally obliged to pay it.


If you and your partner split up, once your finances are resolved you can ask the credit reference agencies for a notice of disassociation.


How you apply for credit

While your credit file does not keep a record of whether you were accepted or declined for credit, it does contain the “hard” searches that have been performed. If you have a lot of searches and no corresponding products, a lender can hazard a good guess at what has been happening. Using a product like ilumoni means you can see what you are likely to be eligible for and keep searches to a minimum.


If you are declined and it surprises you, check to make sure there is nothing there shouldn’t be on your credit file before you make another application.


Having credit gets you credit

Taking out credit just to improve your credit score isn’t necessarily a good thing, even though there is a lot of talk about building your credit score so that you don’t have a “thin file”. A thin file can make it difficult to get credit from lenders who don’t know something else about you (e.g. your bank), but getting yourself into unnecessary debt may not be wise as you will pay more and for longer as interest is applied to a purchase.


That said, there are lots of good reasons to use credit, for example, the protection you get for purchases made on credit cards, to help you pay for things over time and to support bigger purchases. And remember, lots of factors go on your credit file, including utility bills, mobile phone contracts and having a bank account – so be sure to manage those well.


If you want to get a credit card now to build your history because you have a future purchase in mind, it is likely to come at a high interest rate and you must make sure you pay in full every month, both to avoid interest and demonstrate your ability to pay off debt. This should then help you to get access to cheaper credit in future as you’ve been able to “prove yourself”, but only if you are disciplined.


Avoid payday loans

Payday loans usually indicate that you are having difficulties in manging month to month and in particular, will be viewed negatively for things like mortgages. They also cost a fortune so avoiding them is pretty much always a good idea.

What’s the difference between a hard search and a soft search?

A hard search happens when you make an application for credit and is recorded by the Credit Reference Agency(ies) the lender uses.


A soft search happens when a lender looks at your file to give you a quote or eligibility services look to determine your likelihood of being accepted, such as the one ilumoni uses, and is not recorded on your file.


The number and dates of hard searches on your file can be used in credit scoring. If there are several, either recently or at short intervals, a lender may infer that other lenders have declined or you are desperate for credit. You can ask a lender to give you a quote and perform a soft search, though this isn’t very commonly offered.


What’s a thin file?

A thin file is when you don’t have any or much credit history. If you’ve never borrowed anything before, there won’t be any information about how good or bad you are at paying back, though there may be information about insurance that is paid monthly, mobile phone contracts or utility bills.

A thin file can make it difficult for lenders that don’t have any other information about you to accept you for credit. So what can you do about that? Your bank would typically have better information about you, as they are able to see how much you have coming in and going out each month and therefore an idea about whether you can afford credit. You could also take out a credit card that is designed for people with a thin file, however, they are usually at exceptionally high interest rates so you must make sure you pay this back in full every month to avoid paying considerably more than you have borrowed.

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