Credit scores and reports explained

“Credit score” is a phrase you might occasionally think about. Maybe worry about. But do you understand it?

I wasn’t really bothered about my credit score or credit report until a decade or so ago when I had to apply for a mortgage. Only then did I realise just how important it can be.

Fortunately, it was all ok and I got my mortgage. In the years since I’ve kept track – and that’s something you should do to even if you’re not going to buy a house.

Here’s my Be Clever Basics guide.

Credit score vs credit report

Before we talk about your credit score, we need to talk about how it is different to your credit report. These terms are often used interchangeably, but they aren’t the same thing.

What is a credit score?

A credit score, or credit rating as it is sometimes called, is based on this information in your credit report. It’s basically a number that reflects how good or bad your credit report is.

What is a credit report?

A credit report, or credit file, is basically a record of your financial history. Any account that’s required a credit check will be on there as well as any money you owe. It also shows how long you’ve had the account and your payment history, including missed or late payments.

Other elements in your report include details of any bankruptcy, county court judgments and other debt solutions.

You’ll also see your address history and records of any financial connections you have, such as joint accounts and joint mortgages.

Why lenders check your credit report

Your credit report is one of the leading factors that influence lenders when they’re deciding whether to offer you a product or loan.

Using the details on the report they’ll work out whether you’re a good or bad customer for them. That’s not just about how likely it is you’ll be able to afford the borrowing, but also how likely it is they’ll make money from you.

The data in the file can also affect how much you’ll be lent, the length of a deal (e.g. 0% balance transfer cards) or the interest rate offered.

Your credit report is also frequently used to verify your identity.

When lenders search your credit report

Your report isn’t just searched when you apply for “serious” financial products like mortgages, loans and credit cards. Everyday consumer contracts are subject to searches too. 

That’s because you’re essentially asking for credit when you open a new bank account, get a contract mobile phone and switch your utilities.

Even paying your home or car insurance by Direct Debit requires a credit check (it’s usually cheaper to pay these in a lump sum if you can).

Hard checks vs soft checks

Any application for credit will be subject to something called a “hard” search. This will then appear on your report for other lenders to see, whether you’re successful or not. They’ll stay there for 12 months.

However, if your report is looked at by comparison sites or to assess eligibility, this is actually a “soft” check, and though you can see it on your file, lenders can’t.

This distinction can be really important, especially to reduce the chances you’ll get rejected for a new credit card.

Do credit scores matter?

Well, yes and no. Though the score reflects your report, lenders will add in extra information they have on you to decide whether to lend to you.

You’ll have put information on the application form and if you’re an existing customer they might have their own file on you. Plus, an investigation by Money Saving Expert a few years ago found that lenders are using Open Banking data too.

So this means the score won’t reflect everything the lender is taking to account. That can lead to rejection even if you have an excellent score or acceptance with an average score.

But they aren’t pointless. Credit scores are still great indicators of how healthy your credit report is.

The higher your credit score, the more likely it is you’ll get accepted for credit products, or get a better deal such as lower interest payments.

And a low score will indicate a bad credit report, which could mean you get rejected or get offered less money than you need.

So, checking your score will help you decide whether you need to do anything to improve your report. And when those actions make a difference you’ll see that reflected in an increased score, telling you that you’re on the right path.

Who decides your credit score?

You actually have three reports and therefore three different credit scores. These are calculated by three different companies – Experian, Equifax and TransUnion.

These are the credit reference agencies that lenders go to for your financial information.

They all hold slightly different data on you in their credit reports, and then work your score out slightly differently. They even have completely different scales. So you can’t really compare one with another.

It’s worth noting that when you apply for credit, you don’t know which of the three credit reference companies will be used. This basically means all three credit reports are as important as each other.

Checking your credit score

You can check all three scores and reports for free via these websites:

• Equifax via ClearScore
• Transunion via Credit Karma
• Experian via Experian’s CreditExpert. With this one you can get a free 30 day trial – but cancel before the end of the trial to avoid the £14.99 a month fee. You can then get Experian’s free statutory credit report. 

I’ve written in more detail about these different credit score sites and how to check them in this article.

Your credit score is most important when you’re going to apply for a product where your report will be checked. If you know this is coming up, then you should check for any errors or potential problems before applying.

It’s also worth looking at least once a year, if not more often, just to make sure there’s nothing fraudulent going on.