How debt impacts your credit score

Your credit score is one of the key factors that determines whether a lender will approve your application for credit and, if approved, how much you can borrow and how much it will cost.

There are three main credit reference agencies in the UK (Equifax, Experian and TransUnion) that produce a credit score for you. They use different methods and scales, so you’re likely to have a different score with each agency.

Your credit score is not static and can go up or down depending on your current financial status. Many factors can affect your score for better or for worse, and understanding these can put you in a better position to work on improving your credit score.

Factors that can negatively affect your credit score

Some of the factors that could cause your credit score to drop include:

• Already holding multiple credit cards, loans and/or store cards (even if they have a balance of £0).
• Late or missed payments. This applies to all bills, not just those for credit.
• Defaulting on a loan or other credit agreement.
• Using a high proportion of your available credit, such as if you are close to your credit limit on your credit cards.
• Multiple applications for credit in a short space of time. Hard credit checks, such as when a lender checks your score during a loan application, leave a record on your credit file. Too many of these in a short period can have a negative effect as it could indicate that you’re struggling to manage your finances.
• Being linked to others with a bad credit score, such as those with whom you take out a joint bank account, a joint mortgage or other joint credit agreements.
• Being declared bankrupt or entering into a DRO (Debt Relief Order) or IVA (Individual Voluntary Agreement).
• Having a County Court Judgement (CCJ) held against you.
• Having any of the above wrongly connected to your file.

Hard credit checks stay on your credit file for 12 months.

Missed payments, defaults and actions like CCJs, IVAs and DROs typically stay on your credit file for six years.

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 fraud.

Factors that can positively affect your credit score

Some of the factors that could help you to build up and improve your credit score include:

• Registering to vote. Appearing on the electoral roll and updating your details when you move house can help lenders to verify your identity.
• Paying off your debts and bills in full and on time. Credit reference agencies will use your history of bill payments to determine how likely you are to be good at making payments in the future.
• Using a smaller proportion of your available credit. It’s generally recommended to aim to keep your credit utilisation (the proportion of the available credit you use) below 30%. Therefore, if you manage to pay off a credit card (and can resist temptation) it may be worth leaving it open but with a zero balance. This could help your credit utilisation ratio to come down, as long as you don’t build up debt on it. If you’re concerned about getting into debt, cancelling your credit card is likely to be a better option.
• Managing older credit accounts effectively. This can help to make you appear more financially stable than someone who regularly changes accounts.

How personal loans affect your credit score

A personal loan can have a mixed impact on your credit score. Because lenders will run a hard credit check when you apply for a loan, your credit score may temporarily drop. However, if you repay your loan in full and don’t miss any payments, this will help your credit score to improve. Any late or missed loan repayments, or defaulting on your loan, could cause your credit score to drop.

How to check your credit score

Checking your credit score is an important first step in understanding how you can improve it. You can check it as many times as you like without affecting your credit score.

Regularly checking your score ensures that all the details on your file are correct and current.

It’s vital to flag any errors on your credit file with the credit reference agency and the provider to which the mistake is linked.

For example, make sure any debts you have repaid have been updated on your credit report. If this hasn’t updated, contact the credit provider to dispute it.

Also, if you are now permanently separated or divorced from a partner who has a bad credit rating, you’ll want to disassociate yourself – and your credit profile – from them so their poor credit history doesn’t impact your own. You can remove these financial associations from your credit report by contacting the credit reference agencies.

If you see something you don’t recognise on your credit history, such as a loan or credit card you didn’t apply for, this could indicate that you’ve been a victim of fraud. In this situation, you should report the fraudulent activity to relevant providers and contact Action Fraud.