Back in 2017, a company called Equifax announced it had been hacked. And this wasn’t any old data breach: the details of 147 million people – almost half the population of the US – were exposed. All those people’s names, addresses, birth dates, and social security numbers were, just like that, in someone’s nefarious mitts.
Hackers were able to get all this because Equifax isn’t just any old company: it’s a credit bureau. Which means even if you’d never signed up for its services yourself, it still has a ton of information about you and your financial life. Why? So it can assign you the number that controls your financial future: your credit score.
Equifax, along with Experian and TransUnion, makes its money by collecting data on you. They get that data from all sorts of sources – credit card accounts, loan payments, even your phone bill – and they use it to paint a picture of your “creditworthiness”. In other words, how safe a borrower of money you are.
You can access that information whenever you want, but so can third-party providers when you apply for a financial product with them. They then use it to decide if your application gets rubber stamped – or if you’re too toxic to touch.
That means your credit score and credit report (two different things!) are hugely important to your life. If you’re marked out as risky or unprofitable, you might not be able to get a credit card, secure a mortgage, or even rent an apartment. In some places, a higher credit score can even save you money, offering access to cheaper insurance and better credit card rates.
In this Pack, we’ll demystify the world of credit scores, explaining exactly how they’re calculated and how you can improve yours. Stick with us: we’ll get you looking spiffy.
The takeaway: Lenders use your credit score to assess whether you’re a trustworthy borrower.
How is my credit score calculated? Let’s start with a bit of a caveat: every country has its own rules for calculating a credit score. But we’d be here all day if we went through them all, and they all tend to follow the same broader principles in any case. So we’re just going to look at the UK and the US this time around.
Things are relatively simple in the US. Each credit bureau crunches the numbers it has on you to give you a FICO Score. Your score ranges from 300 to 850: the average American’s is 704, and anything above 670 is considered good. FICO isn’t the only score on the market – there’s also VantageScore, which has a different calculation method – but it’s the one 90% of lenders use.
As for what goes into that score – well, it’s sort of a secret, because each bureau gives different weight to the data they use to assign your score. But we do know some of the main components...
The most important factor is your payment history – whether you’ve previously paid your debts on time. Next up is your debt burden: both the amount of debt you have outstanding, and how big a proportion of the credit available to you it is. Your score is rounded out by the length of your credit history **(the longer your accounts have been open for, the better); the ****types of credit used (if you’ve shown you can manage different types of credit, you look more responsible); and your past credit applications **(more on that next session).
How is the UK different? There’s no standardized scoring system like FICO in the UK, which means each lender has its own secret formula. You can access your bureau-issued credit scores, but lenders will only get to see your credit report. This includes detailed information on your financial history, the people and institutions you’re linked to, and court records. The lender then feeds that information into their algorithms to generate their own score and assess your worthiness.
You’ll notice that, in both the US and the UK, one thing that doesn’t go into your credit score calculation is your salary or net worth. As the name implies, your credit score is just about what your past experiences with credit – loans and the like – say about your potential as a borrower in the future. Lenders might directly ask you for your salary info and it’ll likely affect their decision. But a promotion won’t affect your credit score in itself.
So now you know the top-level factors that credit bureaus use to work out your creditworthiness. But what exactly separates a good borrower from a bad one? Onward to find out.
The takeaway: There are plenty of factors about your borrowing history that affect your credit score – but your income isn’t one of them.
What hurts my credit score? If you’ve ever defaulted on a debt or even just been late to pay your bills, lenders won’t view you in the kindest of lights. But there are a bunch of other characteristics which will mark you out as a bad borrower...
Instability. Lenders love a stable life. If you’ve moved house a bunch of times, or if you’re constantly churning through credit cards, your score’s going to take a hit. In the US, the longer your accounts have been open, the better. That’s a little different from the UK, where Equifax and TransUnion advise closing old accounts to keep your total credit limit from getting too high.
Invisibility. Putting all your purchases on a debit card makes your finances invisible to the bureaus. So if you’ve never borrowed money, it’s hard for lenders to assess how responsible you are. Credit cards can get a bad rep, but as long as you use yours responsibly, it’s a good way to build up your credit score for the future. And if you’re based in the UK, you should make sure you’re a visible citizen too: you can boost your score by signing up to the electoral, as it’ll help lenders confirm your name and address. (You should actually be on the electoral roll because it’s illegal not to be, but we won’t snitch.)
Responsibility. Now for the twist: lenders aren’t necessarily looking for people who behave too responsibly. Take credit card companies: they make the most money from customers who are continuously in debt (because those poor souls get charged interest). So if you pay off your bill in full every month and avoid all the fees, you’re actually a less profitable – and therefore desirable – customer to them. But there are better ways to improve your score than getting into debt – so make sure you finish this Pack before you go stocking up on Louboutins and caviar.
Desperation. Whenever you apply for a financial product, the lender will run a “hard” credit check – and record it on your file. If you’re rejected for one loan and immediately apply for another, the new lender will be able to tell. Desperation’s not a good look – especially if your file lists lots of applications in quick succession. Play it cool, man.
Unreliable friends and family. If you’re based in the UK and have a joint account with someone, lenders can look at their credit history when they’re assessing yours. So if you’ve ever had a joint utility bill with a flatmate, your ratings are tied together (don’t worry, you can ask the bureaus to remove them from your file if you don’t live with them anymore). Things are less intense in the States: you’re never judged on anyone else’s personal finances, just their behavior on the accounts you share with them.
Debt burden. Lenders can see the total amount of credit available to you, and how much of it you’re using. The less you use, the better you look – because it shows self-restraint. A good rule of thumb is to use less than 30% of your available credit.
It’s all well and good knowing what’ll give your credit score a tough time. But the real trick is knowing how to improve it, and that’s coming up next.
The takeaway: Lenders want you to look reliable and stable – and desperation is a massive turn-off.
How To Boost Your Score, Fast
How can I find my credit score? There are a variety of services you can use in the UK to access your credit score and (more importantly) credit reports for free. But if they ask you for some cash, get outta there: you have a statutory right to a free credit report.
Things are similar in the US. There are a bunch of ways to access your score from lots of bureaus, and you can get a full yearly report at AnnualCreditReport.com. Be sure to check your report for any errors – if your address is wrong, say, or if you’re linked to an ex-partner. You’ll be able to contact the bureau in question to fix any mistakes.
How can I improve my credit score? Now you know what your score is, you can focus on actually improving it (unless it’s already as good as can be) Here are some quick ways to give things a spruce.
Get a credit builder card. It can be hard to get a credit card if your credit’s not great – but without a card, it’s hard to improve your credit. Go figure. A credit builder card (known as a “secured card” in the US, where you’ll also have to put down a deposit) can help you out here, since they’re designed specifically for people with bad credit. After you’ve used it for a year or so, you should notice a big improvement in your score. Just keep in mind that the interest rate is super high, so you’ll need to make sure you pay it off in full each month. And if you’re in the UK, try to look for one that reports to all three credit bureaus – it’ll have the biggest impact.
Get a credit builder loan. Like the credit builder cards mentioned above, you don’t need good credit to get a credit builder loan. You just need the income to be able to hit your payments on time, and you’ll probably need to meet a few other conditions too. Credit builder loans aren’t available everywhere, so you might need to try smaller financial institutions like credit unions or community banks.
Build credit with your payments. Some free services in the UK, like CreditLadder, let renters’ monthly payments count towards their credit history, helping young people build up their credit history. In the US, it could be worth paying for something similar if your landlord hasn’t already, especially if you’re planning to buy for yourself soon. The free Experian Boost service doesn’t support rent reporting, but it does let your phone and utility bills contribute to your credit score.
Avoid unnecessary applications. As we mentioned earlier, rejected applications look bad on your file. And it’s easy to get caught up in a vicious cycle of constantly worsening your credit score. So you should only ever apply to things you’re confident you’ll be approved for. An eligibility calculator (such as Credit Karma) can help with that: they carry out “soft searches” that don’t show up on your credit file.
Ask for higher credit limits. By increasing the total credit available to you, your credit utilization instantly shrinks. Your existing credit card issuers might agree to give you a higher limit, but it’s worth asking them if they’d do it without carrying out a credit-damaging “hard” check.
Tackle your debt. The best way to fix your credit score if you have high levels of outstanding debt is, hands down, to get rid of it through careful budgeting and regular repayments. Lucky for you, our Dealing With Debt Pack will sort you out in no time. Sure, the credit bureaus may not recognize Finimize as an official way to boost your credit score. But remember our tips and tricks, and you’ll soon see the results for yourself.
🔹Credit scores are a way for lenders to rate your trustworthiness as a borrower. That’s the simple part.
🔹The not-so-simple part is how credit scores are calculated: the main factors are essentially your history with repayments and your existing debt burden.
🔹Remember to play it cool. You need to prove you’re responsible with money, in stable circumstances, and not desperate for cash.
🔹There are all sorts of ways to get your score up: by trying credit builder cards and loans, using special rental and utility payment tools, avoiding unnecessary applications, and tackling your debt.
Now check your Finimize score with our quiz.