Coronavirus and consumer credit ratings: what's the score?

Around a quarter of UK adults claim to know their credit score, according to Experian polling. Here Experian Head of Consumer Affairs James Jones explains how the ratings agency creates a credit score, how is it calculated, and why it matters.

Many people have checked their credit report during lockdown for the first time, which we certainly welcome. Some may have been checking to make sure that emergency payments ‘holidays’, mandated by the FCA as part of the government’s pandemic support package, have not resulted in adverse information appearing on their reports.

This should certainly not be the case, if payment breaks were agreed with lenders. Lender guidelines published by the Credit Reference Agencies (CRAs) in March mean that Coronavirus payment holidays should not marked on reports as missed payments, helping protect people’s credit scores and, as a result, their future access to affordable credit. 

When you apply for credit, the lender will use the information it has available to assess what’s called your ‘creditworthiness’. This covers whether you can comfortably afford more credit and the risk of you not keeping up the repayments. 

The latter, termed ‘credit risk’, is typically assessed by comparing your information to that of past customers. Essentially, if you share key characteristics with past customers who managed credit well, you’re in with a good shout of being accepted. Lenders obtain your borrowing track record (your ‘credit report’ or ‘credit file’) from one or more credit reference agencies (CRA), such as Experian. 

Most lenders receive large daily volumes of credit applications, so to help them assess these quickly and objectively they usually use an automated process called ‘credit scoring’.

Scoring awards predetermined points to key pieces of information the lender has about you, which totted together produce your overall ‘credit score’. If your score meets the lender’s pass-mark, there’s a good chance you’ll be offered credit. Customers with the highest scores may also be offered the best deals, such as high credit limits and low interest rates. 

The scorecard used to award these points is developed using statistical modelling of past customer records. In most cases, the higher your credit score, the lower the risk of you defaulting on future payments – so the more attractive you’ll appear to lenders. Scorecards will differ between lenders, depending on their policies. 

One of the main sources of information that helps determine your credit score is your credit report. This is your recent track record of managing a wide variety of accounts such as loans, credit cards, mortgages, mobile phone contracts, bank accounts and even some regular household bills such as energy, water and broadband.  

Your report also includes a selection of relevant public records such as the electoral register as well as court judgments (‘CCJs’ in England and Wales) and insolvencies. In most cases, your credit report captures your financial behaviour over the past six years. 

Alongside your credit report, the lender might also assess the information on your application form (about your occupation and income, for example) along with any information it already knows about you if you’ve been a customer before. 

There are three main CRAs in the UK that compile credit reports on UK consumers: Experian, Equifax and TransUnion. Because lenders voluntarily share customer information with these agencies, your report at each agency can differ as some lenders only work with one or two.  

Lenders choose to pool their customer payment information in this way because doing so enables them to quickly establish someone’s financial situation regardless of whether they have any prior dealings with and therefore knowledge of the customer. 

If you want to review your own credit report, you can request a copy from each CRA website. You’ll find the relevant links on the Money Advice Service website. If you find anything on your report you disagree with, alert the agency so it can help. 

As well as your credit report you can get guide credit scores produced by each agency, either directly or through third party credit-score services. Experian’s, the Experian Credit Score, won’t be exactly same as the score a lender calculates but should give you a good idea of how a lender might assess your Experian report.  

The guide scores provided by different agencies aren’t directly comparable as they’re calculated using different formulae and different scales, but they should all tell a similar story.  

If you check your score and it leaves room for improvement, the following tips might help you improve it and, ultimately, how lenders view you.

• Build a positive track record. Use some credit, stay within credit limits and never miss a repayment - setting up Direct Debits can help. If your credit history is a little threadbare, getting your name onto the household bills can help as many utility and service providers now contribute information to the CRAs.
• Don’t max out your credit cards. Ideally, keep balances below 30% of the limit on each account. You don’t want to appear over reliant on borrowing.
• Space out new credit applications. You want to avoid looking needy. Use a credit eligibility service such as on the Experian website, to check if you’re likely to be accepted before you apply. If you do have an application refused, find out why before trying again. Our credit refusal pathfinder tool can help point you in the right direction.
• Register to vote. This can give your credit score a small but helpful boost, and it helps identity checks too.