What's A Credit Score & Why Does It Matter?

Everything you need to know about credit scores, easy explained.

If you're wondering what a credit score is and how you can confuse yours, it can be quite confusing to understand. You often hear people talking about credit scores a lot and whether their credit score is high or low, and how this can impact them.

Every adult has a credit score, whether you're aware of what it is or not and it can be impacted by a lot of different factors. Having a good credit score vs a bad credit score can be massively beneficial in life and having a bad credit score can negatively impact you especially in later life, so it's important to understand why a credit score is important and how you can improve yours.

What is a credit score?

A credit score is a rating based on your financial history. Lenders will look at your credit score to determine whether you're financially responsible and whether they would consider lending you money. A credit score is basically a complete history based on previous spending on credit cards or loans you've taken out, but as a student you probably won't have had much experience with that yet, so your score is automatically going to be quite low.

Your credit score is usually a number from a broad range and can be categorised from high to low, and the higher it is the better chance you'll have at being approved for things like credit cards, loans or a mortgage. If your credit score is low, this could mean you're unable to apply for credit, as lenders will be able to see your financial history and that you've spent irresponsibly in the past. Having a low credit score can also cause an issue for more everyday things like when you're trying to rent a flat, get an overdraft or take out a payment plan for a new phone, so it's important to try and keep your score at an average number.

Credit scores essentially show lenders how likely it is that you're going to be able to pay them back, so, for example if you wanted to get a new car on finance if you had a good credit score it would be clear that you've been good with credit in the past and have always paid back any money you've borrowed either on a credit card or as a loan. If your credit score is really bad then it's unlikely you'd be able to get a car on finance, as they will be able to see if you've missed any payments in the past, meaning you're likely to do it again.

What's the credit score range?

There are a few different credit agencies that use a different system to calculate your credit score. In the UK these reference agencies are Experian, TransUnion and Equifax all of which have their own system to calculate a credit score. Normally the score is out of 1000, but it could be a lower range based on where you're looking. Potential lenders are normally able to see your full credit file if they want to, so can see your credit credit history and various scores from different agencies.

What's a good credit score?

This depends on where you're looking and it's worth noting that there's not just "good" or "bad" scores, your score could be somewhere in the middle and this is fine. You don't have to have a perfect credit score to be accepted for credit and loans, but you do need to have an average score. Some lenders might lend to you if you have a bad credit score, but it depends on independent circumstances.

	Experian	Equifax	TransUnion
Fair	721-880	380-419	566-603
Good	881-960	420-465	604-627
Excellent	961-999	466-700	628-710

What's a bad credit score?

Bad credit scores will be below a certain number, based on what agency you're checking. As most credit agencies rate you out of 1000, any number that's lower than around 500 is normally considered lower than average and the further away you get the worse your score is going to be. Credit scores are normally categorised by excellent, good, fair and poor.

How is a credit score calculated?

Your credit score is calculated by a number of factors, many of which you can control and improve. First of all, lenders look at your credit history. If you have a credit card, this can account for a large part of your credit score. Lenders can see how much you're borrowing and if you're paying it back and if you miss any payments this will stay on your report for six years, so if you accidentally miss a few payments while you're younger it's going to impact your credit score for quite a while. Lenders can also see if you've taken out any loans, such as a phone or car on finance and if you've applied for credit recently. This can be credit cards, bank accounts, or a wifi account as technically all of these are bills that you're paying for monthly.

Other things that can impact your score are going near or over your credit limit on a credit card, taking out too many credit applications in a short period of time, bankruptcies, County Court Judgements (CCJs) and withdrawing cash from a credit card.

As a student, your credit score is normally quite low as students normally haven't taken out a credit card yet and won't have a lot of experience with borrowing money, meaning there isn't much to build a report on. While not having a credit card or taking out loans can cause you to have a low credit score, there are also some other things that can impact your credit score that you might not expect, such as not being on the electoral roll which is something you can do to instantly improve your score.

What are credit scores used for?

Credit scores are used by lenders to help decide if they want to give you credit and to see if you're financially responsible. It's important to have a good credit score or to be making steps to improve your credit score as there are a whole bunch of things that credit scores are used for, that can especially be important after you've graduated.

One of the most obvious things a credit score is used for, is to determine if you're eligible for a credit card which is one of the most common forms of every day credit that people rely on. If you have a low score, it can decrease your chances of being accepted for one. However, there are credit cards that are designed for students or people with low credit scores and these usually have lower limits and higher interest rates.

Trying to find somewhere to live also heavily relies on your credit score, whether it's renting or buying. If you're applying for a mortgage you're going to need to have a good credit score in order to show that you're responsible and you will pay back the money that you're borrowing on time. As missed payments and discrepancies can stay on your credit file for 6 years, this can mean that if you make a few mistakes as a student this can stay causing you problems if you're in the position to apply for a mortgage later on in your 20s. When renting a property, landlords or estate agents also look at credit scores, to see if you're going to be able to pay your rent on time. If you have a low credit score and a history of missed payments, this is going to make landlords less likely to want to accept your application to rent their property, as they will assume that you're not going to pay the rent on time or at all.

Credit scores can also be used for more every day things, such as buying a new phone on a payment plan, using Klarna to buy clothes or opening an account to buy wifi. All of these companies will run a credit check on you to see your credit history and if they don't think you'll be reliable enough to pay back what you're asking to borrow in monthly instalments, then you'll probably be denied on your application.

As a student you probably aren't considering buying a house or taking a car out on finance immediately after graduating, but having a low score as a student can hold you back from every day things too, so it's important to keep an eye on your score and do what you can to improve it.

If you're wondering just what your credit score actually is, you can view your credit score on free websites such as Experian and Clearscore to keep track of what it is and how it changes over time.

How to improve you credit score

If your credit score is bad or lower than you'd like it to be, here are a few things you can do to improve your score.

Take out a credit card

The easiest way for students to improve their credit score is to take out a credit card and improve that you're a responsible borrower. Getting a credit card is a big decision and not one to be taken lightly, so make sure that you've researched credit cards before hand and you're confident that anything you spend on your credit card you'll be able to pay back. Having a credit card and not ever using it or massively overspending on it can negatively impact your credit score, so making sure you're using your credit card here and there for small purchases and paying it off monthly is the best way to safely and responsibly build your credit score.

Get on the electoral roll

This can automatically improve your credit score as it shows a fixed address, so if you're not on it or you've recently moved make sure you get on the electoral roll as soon as you can.

Don't close your accounts but also keep an eye on them

If you open multiple accounts and switch around a lot, this can lower your credit score whereas having had an account open for a long time can increase it. However, if you do have old accounts open that you no longer use make sure to close them as having too many can also reduce your score.

Don't make too many credit applications

If you want to apply for a credit card use a comparison tool such as Money Supermarket or Compare The Meerkat to see what cards you could be eligible for, before you apply to them and apply to just one and see how that goes. When you make credit applications these appear on your file and having too many can reflect badly on you and decrease your score.

Stay within your credit limit

The golden rule to having a credit card is staying below 30% of your limit. This shows that you're being responsible and you're not overspending. Going over or too close to your limit can drastically decrease your score, so try not to go anywhere near your limit.

Pay off your balances on time

Most importantly, a good credit score is a reflection of how you spend, so if you pay off all your balances on time it will improve your score and keep it high.

For more help check out the best student credit cards and how to manage your money and make it go further.