How debt impacts your credit score

The amount lenders are prepared to offer you in terms of credit (loans, credit cards, store cards, etc.) is governed by your credit score.

Basically, this is a rating you are assigned by a credit score agency, based on how well you have previously handled credit, as well as the type and amount of credit you have currently.

There are three main credit reference agencies in the UK: Equifax, Experian & TransUnion. These all use different methods and scales when issuing a credit score. It’s perfectly possible to have a different score with all three credit reference agencies.

Lenders will use the credit scores from these agencies to not only determine if they will lend to you, but also how much and at what rate of interest.

Having a good credit score is therefore very important. Check your credit score today.

Your credit score is not static and will change over time due to a number of factors. It can go up or down depending on your current credit status.

One of the most important elements that will impact your credit score is your history when it comes to payments. In particular, unpaid debts and missed payments will reduce your credit score and thus your eligibility to borrow money. This element accounts for 35% of your credit score with most lenders.

Outstanding debts will have an influence on your credit score – particularly if you have a large amount of credit already. In addition, if you are using more than 30% of your available credit this will be taken as a negative factor.

Another thing that will impact your credit score is whether you have a mix of credit account types. Credit scores will look at what other forms of credit you have and use this ‘credit mix’ to determine how you are handling this debt now or how you have done in the past.

• Not appearing on the electoral roll.
• Using more than 30% of your available credit.
• Already holding multiple credit cards, loans and/or store cards (even if they have a balance of £0).
• Late payment/non-payment of bills.
• Defaulting on a loan or other credit agreement.
• Multiple applications for credit in a short time. ‘Hard’ enquiries, such as when a lender checks your score to assess your credit worthiness, leave a record. Too many of these in a short period can have a negative effect.
• Being refused credit by a lender.
• Being linked to others with a bad credit score – e.g. those who you take out a joint mortgage or other joint credit agreements with.
• Being declared bankrupt or entering into an IVA (Individual Voluntary Agreement).
• Having a County Court Judgement (CCJ) held against you.
• Having any of the above wrongly connected to your file.

Having a criminal record will not directly affect your credit score, however, most credit agreements will ask you to declare previous convictions, which may influence their decision to lend – especially if your crime was financial in nature or for fraud.

A negative credit score isn’t set for life and there are ways in which you can repair it. You can see more in-depth information on these in our guide on how to improve your credit score.

Most important will be to reduce and ideally pay-off your outstanding debts but there are a few other things you can do too:

1. Check your credit report and have any mistakes removed
This can be a vital first step in understanding what elements are causing your credit score to be down. In particular, check that all the details are correct and current. For example, if you are now permanently separated or divorced form a partner who has a bad credit rating, this can lower your own score. Also, check for debts that you have now repaid and ensure this is a correct record of your financial history. Start now by getting a FREE credit check.

2. Register on the electoral roll
If you haven’t already, register to vote at your current address. You are not obliged to vote in any UK election, and this is a quick and easy way to boost your credit score.

3. Don’t miss payments for your current credit commitments
Every late or non-payment will count against you when it comes to your credit score. This applies to all bills, not just those for credit (although these are important). Pay rent, mortgages and all utility bills on time. Credit reference agencies will use your history of bill payment to determine how likely you are to be good at repaying in the future. Hence, every time you pay a bill on time this improves your standing.

4. Pay off as much debt as possible
Your credit utilisation score is influenced by how much money you currently owe and the mix you have of credit accounts. Therefore, it’s a good idea to get this total down as much as you can. If you manage to pay off a credit or store card completely (and can resist temptation) it’s a good idea to leave this open but with a zero balance. This will be seen as positive in terms of your credit score.

5. Don’t apply for too much credit at once
Opening a new form of credit causes a ‘hard’ enquiry to be logged against your credit records. Too many of these in a short space of time can lower your credit score, although this will fade over time. Also, don’t take out credit that you don’t need – even if you think it improves your credit mix. Too much credit not only impacts your credit score, but it can also tempt you into spending beyond your means and accumulating more debt.

You might assume that your credit score is only of interest to lenders who are judging your ability to handle credit, but your credit score could be checked by a number of other interested parties, including:

• Future employers – While you might expect this if applying for a job in the financial services sector, this is becoming common practice across the job market. A bad credit score can suggest to prospective employers that you are unable to handle your personal finances. This is especially pertinent if your new job involves managing a budget or being responsible for handling payments.
• Landlords – Prospective landlords and letting agencies may use your credit score to determine if you are likely to be a risk when it comes to paying the rent on time. A poor credit score may influence their decision to let to you, instead favouring someone else who has a better credit history.
• Car hire and other rental companies – A bad credit score could make it more difficult to hire vehicles or equipment. The hire company may ask for additional security payments in the face of someone who apparently has a poor track record in paying their bills on time.
• Mobile phone providers – If you are obtaining a mobile phone as part of a new phone contract, then the supplier will check your credit score to determine if you are a credit-worthy person. A bad credit score may result in them only being able to offer you pay-as-you-go or sim-only options.

For more information on debt and how to deal with it, see our 'when to seek help with your personal debt' guide.

Each of the three credit reference agencies here in the UK can be found online. You can use these websites to contact them if you feel there may be errors or mistakes in your records:

Equifax
Experian
TransUnion (Formerly Callcredit)

To check your own credit score, you can simply get a free credit check today.