Understanding your credit score is important as lenders use it along with your credit history to assess whether they should give you loans, mortgages and to decide what interest rates you'll get. Your credit score is like a grade for how good you are at paying back the money you borrow. This guide will explain everything about credit scores in easy terms, from what affects your score to how you can make it better.

How can you check your credit score?

To manage your money efficiently and reach your financial goals, it is useful to check your credit score regularly. Good news, checking your credit score is free and can be done easily. Here are several ways to do it:

Check your credit score online

Many credit reference agencies offer online platforms where you can sign up for an account and access your credit report and score instantly. You can usually view your score as well as detailed information about your credit history, including factors influencing your score.

The most well-known agencies in the UK, Experian, Equifax, and TransUnion, each offer a free service to check your credit score on their website. Note that each agency may offer slightly different scoring models and features, so it can be beneficial to check with more than one.

Use a mobile app

Some credit reference agencies have mobile apps that allow you to check your credit score on the go. These apps often provide additional features such as credit monitoring alerts and personalized recommendations for improving your score. You can for example check out Credit Karma, which provides you with your credit report and TransUnion credit score.

Check out your credit card provider

Some credit card providers offer their customers free access to their credit score as part of their services. You can usually view your score by logging into your online banking account or through the provider's mobile app.

Open your banking app

Some banks in the UK, such as NatWest, also provide credit score monitoring services through their mobile banking apps. You may be able to check your score along with other banking information, such as your account balances and transactions.

These checking platforms usually show your credit score only. For a more in-depth dive, you will need to enquire for your credit report which includes credit history with loans, repayment behaviour and such. Being aware of your credit score is a good starting point to understand your financial situation.

What is a good credit score?

A good credit score varies depending on which agencies you’re dealing with. Experian rates scores from 881 to 960 as good. For Equifax, scores from 604 to 627 are worth a good rating.

This difference is due to the fact that each agency has its own scoring range. This is why talking to a credit counsellor can be helpful. No matter which agency you are using,the factors used to calculate your score will be payment history, credit use, and length of credit history.

You can easily check your credit score online for free to better understand your financial situation

Why does having a good credit score matter?

Having a good credit score matters in the UK because it affects your ability to borrow money. Banks and lenders use it to decide if they'll lend to you and what interest rates they'll offer. A higher score means better chances of getting loans and credit cards with good terms. The higher your credit score, the better your financial reputation, which can then lead to more opportunities for bigger loans or investments later on.

How important is your Credit Score to secure a mortgage approval?

Your credit score is a critical factor in securing a mortgage approval. Lenders use it to evaluate your creditworthiness and determine the risk of lending you money. A higher credit score indicates responsible financial behaviour and makes you a more attractive borrower.

A good credit score not only increases your chances of getting approved for a mortgage but also affects the terms you'll receive. Lenders typically offer lower interest rates and better loan terms to borrowers with higher credit scores, saving you money over the life of the loan.

On the other hand, a low credit score can hinder your ability to secure a mortgage or result in less favourable terms. Lenders may view you as a higher-risk borrower, leading to higher interest rates or requiring a larger down payment to offset the risk.

Depending on the type of mortgage you are trying to secure, the criteria you need to meet can be different but in most cases your credit score remains important. Remember to do your research to make sure you choose the right type of lender to secure the mortgage you are after.

How to improve your credit score?

After checking your credit score, you might be disappointed by the number. Don't worry, there are some ways to improve your rating and increase your chance of being approved for a mortgage. Some of the most well-known ways to building your credit score are:

Pay your bills on time to improve your credit score

One of the most important factors affecting your credit score is your payment history. Ensure you pay all your bills, including credit card bills, loans, and utility bills, on time every month. Late payments can have a significant negative impact on your score.

Reduce your credit card balances

High credit card balances relative to your credit limits can harm your credit score. Aim to keep your credit card balances low, ideally below 30% of your available credit limit. Paying down your credit card balances can improve your credit utilization ratio and positively impact your score.

Limit your credit applications

Each time you apply for credit, whether it's a credit card, loan, or mortgage, the lender will perform a hard inquiry on your credit report, which can temporarily lower your score. Minimize the number of credit applications you make, especially within a short period, to avoid multiple hard inquiries.

Build a positive credit history

Having a longer credit history can improve your credit score. If you're new to credit or have limited credit history, consider opening a credit card or taking out a small loan and making timely payments to establish a positive credit history over time.

Diversify your credit mix

Having a diverse mix of credit accounts, such as credit cards, loans, and a mortgage, can positively impact your credit score. However, only take on new credit accounts if you can manage them responsibly.

Consider credit-building products

If you're struggling to qualify for traditional credit products, consider credit builder loans or secured credit cards designed to help individuals build or rebuild their credit. Please, remember to always seek advice from a financial advisor to pick the best way to do this.

Do services like Klarna affect your credit score?

Using online payment services that allow you to shop now and pay later can have an effect on your credit score. Klarna is one of the most popular platforms to pay your purchases in several instalments.

The first thing to note is that credit referencing agencies will be notified by Klarna that you have an account. They will also let them know whether you are using the Pay Later feature or the instalments service.

When it comes to protecting your credit score against any negative impact, it is important to make the payments back on time. This is no guarantee that your credit score will build and improve, however.