What is a Credit Score and How Do You Improve It?

Want to know how to improve your credit score? You’re not alone if you find credit scores complicated or difficult to understand. The truth is there’s often not a lot of simple and easy-to-understand information out there for students when it comes to credit scores and the basics. Your credit score is important for later on in life, but if you’re just getting started in the credit world it’s not something to stress about too much.

If you want to know how to check and improve your credit score, here are all the basics you need to know about credit scores and the key dos and dont’s.

What is a credit score?

A credit score is a 3-digit number that shows how likely you are to be accepted for credit and the higher the number is the more likely you are to be accepted. Credit includes any type of loan such as a mortgage, taking a car out on finance, buying a new phone in instalments or getting a credit card.

There are a lot of things that can impact your credit score. If you’re making applications for credit, for example wanting to get a credit card, the lender (in this case the bank you’re getting your credit card from) will look at your credit score and your existing credit history to see if you’re eligible for the credit card. This means they’ll be making an assessment of whether they think that you’ll be a responsible credit card user and will be able to pay back any money you borrow. If your credit score is bad, you’re likely to be rejected and this can be really detrimental later on in your life, for example, if you want to buy a house and are trying to get a mortgage.

What is a good credit score?

This depends as there are a few different credit rating agencies in the UK, including Equifax, Experian and TransUnion. Each credit rating agency ranks credit scores differently, but all of them rank credit scores in 3 categories; fair, good and excellent.

For example, Experian rank out of 999, so a number between 961-999 is considered excellent, whereas 881-960 is good and anything below 880 is fair and could be improved. On the other hand, Equifax ranks out of 700, so an excellent credit score would be between 466-700, a good score would be 420-465 and anything below 419 would be fair and could be improved.

The truth is, there is no magic number that’s good vs bad as different lenders will be looking at different things and will have different eligibility criteria, but there are many factors that can make your credit score good vs bad.

What is a bad credit score?

There is no specific number that is necessarily bad, however, your credit score can definitely be a lot lower than what is ideal. Most credit score apps or websites will indicate if your credit score is lower than average and will rank your credit score as either excellent, good or fair. If your score is excellent then you don’t really have anything to worry about and if it is good or fair there will be improvements that you can make.

What is the average UK credit score?

According to Experian, the average UK credit score is 797 out of 999. This accounts for people of all ages, including those that have mortgages or multiple items on finance. There isn’t really a golden number, but most adults will be aware of their credit scores and are actively trying to either improve their score or keep the number consistent, as a low credit score could lead to you being rejected for mortgages, loans, or credit cards.

How to check your credit score

There are several free apps and websites you can use to check your credit score. Experian and Clearscore are the biggest free sites that will show you your credit score, but you can also use comparison sites such as Moneysupermarket.com. If you want a more comprehensive look at your credit score and report, Equifax will give you daily reports and updates, however, you will need to pay £10.95 per month, although you can get a 30-day free trial.

How to build your credit score

For students, you probably won’t have had a huge chance to grow your credit score yet, as you’re unlikely to have a mortgage, multiple credit cards or items on finance. This means that if you check your credit score for the first time it can actually be quite low, however, this is just because you have no borrowing history and it’s nothing to stress about.

If you want to build your credit score here are a few simple things you can do to get started:

• Get on the electoral roll
• Apply for credit, such as a credit card or take out a phone on finance and make the payments regularly
• Not apply for too many things within a short period of time
• Pay your bills on time
• Not go into an unarranged overdraft

A good way for students to build credit without taking out a credit card is by buying something on finance, such as a phone or computer and setting up regular direct debit payments each month. This way, you won’t miss any payments and you’re showing lenders that you are responsible and will pay back what you’ve borrowed on time.

How to use credit cards to build credit

When used correctly, credit cards are one of the best ways to build credit. Using a credit card regularly and paying it off monthly, is a really great way to show other potential lenders that you’re responsible. Credit cards often have large limits, and as a general rule, you should not use more than 25-30% of your allowance. This means if your credit card limit is £5,000 you should not spend more than £1,400. Keeping a balance below £1,400 and regularly making payments to pay off what you’ve borrowed and not missing any payment dates will show that you’re a responsible lender and in turn, boost your credit score.

However, credit cards can be a slippery slope and it can be very easy to fall into debt. If you go over 25-30% of your allowance, get close to maxing out your credit card, use your credit card to withdraw cash and miss payments this can instantly damage your credit score and it can be difficult to pay off the debt and build your credit score back up again.

For students, a credit card isn’t necessary for uni, however, if you feel like you’re responsible and will use a credit card sensibly it is a good option to improve your credit score and help you out between paydays or student loan payments.

How long does it take to improve a credit score in the UK?

Improving your credit score isn’t necessarily an overnight fix. Most credit rating agencies will update your score monthly, which allows enough time for any changes you make to show up on your account. For example, if you register to vote, this may not show up on your credit account for a few weeks.

If you want to improve your credit score by taking out a credit card, or another form of credit such as a phone or car on finance it may take months to see a difference in your score. This is because you need to use your credit card and show that you’re making regular monthly payments before it can have a positive impact.

What affects your credit score?

There are a few things you’ll want to steer clear of when it comes to negatively impacting your credit score. Some of the things that will affect your credit score badly include:

• Missing payments
• Being too close to your credit card limit
• Withdrawing cash from a credit card
• Going into an unarranged overdraft
• Applying for credit too frequently
• Borrowing or using more than you can afford to pay back

Does an overdraft affect your credit score?

This will depend if you’re using an arranged or unarranged overdraft. Most student bank accounts will have an arranged overdraft, where you’ve agreed with your bank on an overdraft limit which is ok for you to dip into if you need to. Using an arranged overdraft won’t impact your credit score, as long as you stay within your agreed limit. So, if you are a regular overdraft user, you don’t need to worry about how this will affect your credit score. In fact, using your overdraft can actually improve your credit score if you use it sensibly and regularly pay it off and stay within your limit as it shows you’re a responsible borrower.

However, using an unarranged overdraft will definitely have a negative impact on your credit score. An unarranged overdraft is when you don’t have an agreed overdraft limit with your bank or you’ve gone over your agreed limit. An unarranged overdraft will normally charge you interest for being overdrawn, or decline your payments. On top of this, it will show potential lenders that you’re bad with your finances and they won’t want to accept you for future credit loans, such as taking out a car on finance or buying a new phone on a payment plan.

Student bank accounts will normally have large arranged overdrafts compared to standard bank accounts, so if you don’t have an overdraft it’s worth switching your bank account to take advantage of the student offers while you can.

Do student loans affect your credit score?

No, student loans do not appear on your credit score or affect your credit score. Student loans are different to other loans as you don’t need to pay them back until you’re earning a certain amount, and you will pay it back in affordable instalments which are taken directly from your paycheck.

Does Klarna affect your credit score?

Yes, Klarna can affect your credit score but only if you miss payments or don’t keep on top of your purchases. Buying something with Klarna will not affect your credit score, so it’s safe to use Klarna as often as you like without any risk if you don’t want to pay for something straight away.

However, if you don’t make your payments on time, have unpaid balances or extend the payment deadlines too many times this will show up on your credit report to lenders, which can impact your credit score and your chances of being approved for future credit. So, you should only be using Klarna if you know you’ll be able to pay off your balances and you keep a note of when your payments are due.

However, as of 2022 Klarna will now share your buy now pay later purchases with some credit rating agencies. This means that they will be able to see that you’ve made purchases with Klarna, but if you pay them off on time, this shouldn’t impact your credit score and can actually show lenders that you’re a responsible shopper and always pay off what you’ve borrowed.

Does Clearpay affect (or improve) your credit score?

Similarly to Klarna, Clearpay won’t directly impact your credit score. Clearpay won’t share your purchases with any credit rating agencies, so your Clearpay history won’t be visible. However, just like Klarna, if you miss payments, this will have a negative impact on your credit score, so always make sure you’re keeping track of your payments and not taking out anything you can’t afford to pay back.

Does Paypal Pay in 3 affect your credit score?

Using Paypal Pay in 3 won’t impact your credit score. However, like Klarna, Paypal will share your purchases with credit rating agencies, so they will be able to see what you’re borrowing. If you pay off your payments on time, this will have no impact on your credit score, however, if you miss payments or your payments get declined and you don’t reach out to Paypal to rectify this straight away, it will have a negative impact on your credit score.

How does Paypal Pay in 3 work?

Paypal Pay in 3 is an easy way to pay for things that you may not be able to afford straight away, as it gives you the option to split the cost into 3 equal instalments. This means that if you want to buy something that costs £120, you will only need to pay £40 straight up. You will pay the next £40 a month later, and the 3rd and final payment of £40 a month after that.

When you choose to pay with Paypal Pay in 3, the payments will be automatically split into 3 and scheduled to your bank account. You will be able to see when your payments are due on your Paypal account and won’t be able to edit this once you’ve agreed to it. You are also able to pay off any remaining balances at any time, so if you want to pay off the remaining £80 of your payment early, you can at any point.

Does gambling affect your credit score?

Gambling does not directly affect your credit score or show up on your credit report, however, it can cause you to quickly fall into debt which in turn can damage your score. If you are regularly gambling this can lead to debt building up and losing large sums of money. If you’ve taken out things on credit, such as a credit card or a car on finance, you may be unable to make your payments on time if you don’t have the money to pay them due to gambling.

Frequent gamblers may also turn to credit cards or loans to fund their addiction, which can lead to maxing out credit cards and falling quickly into debt. So, for students who may regularly place bets on sporting events, you should always bet responsibly and keep on top of your betting habits.

Does checking your credit score affect it?

No, checking your credit score will not have a negative impact on your score. You can check your score as often as you want without any issues — in fact, it’s encouraged to regularly check your credit score so you can keep on top of it and be aware of any major changes.

Does voting increase your credit score?

No, voting doesn’t increase your credit score. However, being on the electoral roll and being registered to vote will improve your credit score and is something that you should do as soon as you turn 18. Being registered to vote, whether you actually vote or not will have a positive impact on your credit score, so if you want to build your credit score for the first time you need to get on the electoral roll.

How to get on the electoral roll in the UK

Being on the electoral roll is an easy way to boost your credit score. If you’re not on the electoral roll, you can register to vote here and add your permanent address. For students who move address each year, it may be a better option to register using your home address where you reside outside of term time and opt for a postal vote, otherwise, you’ll need to re-register every time you move.

The longer you’ve been on the electoral roll and stayed at one address, the more positive this can be for your credit score. Lenders don’t like to see too many address changes in a short period of time, so your parent’s address is probably your best option if you’re living in student halls.

Does voluntary termination affect your credit score?

If you’ve taken a car out on finance, your circumstances may change and you may want to voluntarily terminate your agreement. Voluntary termination actually won’t impact your credit score, as you are exercising your legal right to terminate an agreement. However, while this will show up on your record and it won’t impact your credit score, it may impact your chance of being accepted for another car on finance from the same loan company.

Best credit score apps

Some apps you can download to check your credit score include:

• Experian
• Credit Karma
• Clearscore
• Money Supermarket

By regularly checking your credit score you’ll have a good idea of how you can improve if necessary and potential areas for improvement. Remember, your credit score doesn’t update daily so it may take a month or so for any big changes to show up.

For more help and advice around money and finances don’t forget to check out the rest of our money content to help you make smarter and more informed financial decisions.