What is a credit rating and how to improve it

What is a credit rating

This page was last updated on 1 July 2021

What is a credit rating and how to improve it

Understanding credit ratings can be tricky. There is a lot of jargon when it comes to advice about credit scoring and many people need extra support understanding their options.

This article guides you through everything borrowers need to know about credit ratings and credit scores. 

It gives you a definition of what credit scoring is, tells you what information is included in your credit report, and gives you tips on how to improve your personal credit score.

Topics that you will find covered on this page

You can listen to an audio recording of this page below.

What is a credit rating? 

A credit rating is essentially the way that a lender assesses you to see whether they should lend you money. In the assessment, an agency calculates the credit risk you pose, i.e. the risk involved with lending money to you.

It’s a way of predicting a borrower’s future financial behaviour based on how that borrower has acted in the past. 

For example, imagine that you have previously struggled to pay back debt. This payment history will suggest to lending firms that there is a high probability that you will fail to meet the level of monthly instalments you have to repay in the future. 

In this case, the chances are that you will have a low credit score and you might not get the credit you are applying for.

How is a credit score calculated?

A third-party credit rating agency (CRA) checks your credit history to create a credit profile. The CRA calculates your score and generates a credit report.

The lender then looks at the history listed in your credit report and works out if you seem to be in stable financial circumstances.

When considering the credit risk you pose, lenders take into account factors such as:

  • Your address history
  • Your borrowing history, such as how you have managed your existing bank accounts and debts
  • Your past and present financial partners

Your credit report also contains public record information such as county court judgements, your information from the electoral register, and bankruptcy and insolvency records.

Notice that credit reports do not provide information about your salary or income. Your student loans, criminal record, driving fines, council tax arrears, medical history, or parking fines also do not appear on the report.

That being said, you may be required to provide this information in your application form when you apply for credit.

Here is a short video that explains how credit reports work in the UK.

Is credit score and credit rating the same thing?

Credit scores and credit ratings are very similar. Both are systems that lenders may use to check your credit risk when you apply for credit. You may see the terms used interchangeably.

However, technically there is a key difference. A “credit rating” is usually given to a business or a government. A “credit score” on the other hand is normally used to grade the creditworthiness of individuals.

In both cases, an independent third-party rating agency will check your credit and create your score (not the lender themselves). 

What is a credit rating out of?

Most often, a “credit rating” is expressed as a letter grade from AAA-D. 

The “credit score” of an individual is normally given as a number between 300 and 850. The score you are given is based on the reports of the three main credit reporting agencies (see below).

What is a good credit score?

If your credit score or credit rating falls in the top third of the scale, lenders will normally consider this to be a good score. 

Credit ratings with numbers or letters  in the bottom two thirds of the system’s scale are thought to be risky.

For example, this means that lenders consider a credit score above 650 to be a good score. Credit ratings between BBB and AAA are also acceptable.

However, different credit reporting agencies have different scales. You can read a breakdown of the different credit score systems here.

Different lenders also have different lending criteria – so a good score according to a rating agency unfortunately doesn’t guarantee that your application will be successful. Nonetheless, the CRA scores are a good rough guide and it makes sense to check where you fall on their scale.

Why is credit rating important?

Credit card companies and other lenders will use your credit report to decide whether or not to give you credit. This “credit” may be a mortgage, a bank card, a personal or joint loan, mobile phone contracts, a rental agreement for a house, or something else.

Your credit rating is important because it may affect the percentage interest rate you get on loans and bank cards. 

A person with a good score may also be able to access a more generous credit limit. Finally, your credit report may impact how easily you can access the services of credit providers.

For example, if you have a low credit score then you might have difficulties renting. This is because landlords might reject you from renting their house as they can’t reliably expect you to meet your rent obligation each month based on your credit history.

Meanwhile, if you have a good score, then credit corporations will trust you to pay back what you owe. On average, they are therefore more likely to give you new credit.

"Most often, a “credit rating” is expressed as a letter grade from AAA-D.  The “credit score” of an individual is normally given as a number between 300 and 850."

What is a credit provider?

A credit provider is a company which offers financial solutions to consumers in need of extra cash to cover costs. Consumers can use their solutions to borrow money by taking out a loan, secured credit, mortgages, or applying for a credit card.

All credit providers are authorised and regulated by the Financial Conduct Authority, an independent trade body which monitors the behaviour and practices of these businesses.

Not all credit providers are banks or building societies: when you take out a mobile phone contract, get monthly car insurance, or rent a house, you may need to go through a credit check.

There are seven main types of credit provider: banks, supermarkets, credit unions, peer-to-peer lenders, payday loan companies, logbook lenders, and organisations offering hire purchase agreements. You can read more about the differences between the types of credit providers here.

credit rating

Who has my credit report?

In the UK, your credit file is held by the three credit reference agencies (CRA): Equifax, Experian, and TransUnion. 

You can access your credit file and see your score free of charge. This is a legal right and is fairly simple to do.

Beware that there are warnings of scammers who attempt to charge you to access your credit report. These fraudsters often call themselves “credit repair companies” and pretend to be advisers, when they are in fact trying to get you to break the law by lying to the CRAs.

How to improve your credit score

To improve your credit score, you need to demonstrate to credit reference agencies that you can be trusted to repay the amount of money that you borrow without any problems. 

A better credit score will mean that you receive better interest rates on loans and in bank accounts, and that you will be able to rent property and get mobile phone contracts more easily.

credit report

How can I get good credit now? 

By making a series of small financial improvements, you will be able to raise your credit rating:

  • Register to vote in your local area. Doing this will only take a couple of minutes, and importantly, by putting your name on the electoral roll you will help credit agencies confirm the personal details that you have provided.
  • Remove past financial partners from your file. If you let the credit reference agency know that you are no longer associated with a financial partner with poor credit, then your rating could improve. This is because their debts may have been affecting your credit score.
  • Get text alerts for your credit cards. Opting in to notifications will help you control your spending. These real-time alerts will also have the added benefit of preventing fraud, as you can spot it immediately.
  • Speak to your lender. If you are having difficulty making your credit card’s repayments on time, or if you are having other financial issues, you can talk to your lenders. They can help by changing the dates that your money is due, give you debt advice, or potentially set up a direct debit.
  • Check your credit file. You might spot mistakes in your file and you can take steps to get them corrected. You will also be able to add 200 words to your file to explain your financial situation to any enquirers who read your file in the future.

If you have been the victim of impersonation or fraud, it is especially important to check your credit report. Reminder: if there is an error in your listed credit history because of this fraud, then you will be able to make a statement and request a correction. 

What can I do to get good credit in the future?

Although you can make small changes to improve your credit score in the short term, there are other actions you can take to make a bigger difference in the long term and ensure you have a good score going forward.

Being organised and making changes to control your debt and introduce more stability to your life will raise your credit score. It’s a good idea to:

  • Reduce your debt. If you can pay off some or all of your outstanding debt, the likelihood is that rating agencies will see you are actively trying to improve your debt problems and become more reliable.
  • Pay utility bills on time and avoid your overdraft. If you can keep up with the payments you owe across your bills and contracts, it demonstrates your credit worthiness. That means it shows you can be relied on to pay back borrowed money on time.
  • Only apply for credit cards that you really need. If you have lots of credit applications listed in the records of your file, then the lender will conclude that you are struggling financially and are not in a stable financial position. 
  • Reside at one address for a long time. Once again, lenders like stability. If you want to improve your rating and you have the ability to remain living at your current address for a long period, then you should stay living at this place of residence.
  • Use your credit cards responsibly. Always aim to make at least the minimum payment every month, and to do so on time. You should also try to stay within your credit limit.

Remember that each credit card application is kept on your credit record for about one year. So, spacing out the applications will help avoid this problem.

In general, not repaying the minimum you owe or missed payments will hurt your credit rating, whereas paying back more than the minimum will show that you can be relied upon. Staying out of overdrafts is also an important indication of your credit worthiness.

What are the causes of a bad credit rating?

Credit scores can also be impacted negatively by things that you do.

For example, you should not exceed the credit limit of your overdraft. As mentioned above, you also shouldn’t make multiple applications for credit cards at the same time. 

Bankruptcies, insolvencies, county court judgments, and defaults on your credit agreements can all call your reliability into question too. 

Another thing to note is that you should not automatically close old credit card accounts early. Depending on the lender and how long you have had the account for, having old credit accounts could have either a good or bad impact on your score. 

For instance, if you have responsibly used your card for several years, then it may be a good sign to lenders and rating agencies that you can control your finances well.

Having no credit history in your records can also negatively impact your score, because there is no evidence proving that you can borrow responsibly and pay back debt.

Finally, don’t forget to check your credit report for errors or any mistake due to fraud or identity theft. There is potential that this could have negatively impacted your score.

If you are still unsure about the credit rating system, it may be helpful to seek expert guidance from an independent financial adviser. They can answer any kinds of credit questions that you have to help you understand the points above as well as the bigger picture. 

A guide can also help you sort out your finances if you are having trouble managing your money.

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Frequently Asked Questions

What is a credit rating? 

A credit rating is essentially the way that a lender assesses you to see whether they should lend you money. In the assessment, an agency calculates the credit risk you pose, i.e. the risk involved with lending money to you.

It’s a way of predicting a borrower’s future financial behaviour based on how that borrower has acted in the past. 

How is a credit score calculated?

A third-party credit rating agency (CRA) checks your credit history to create a credit profile. The CRA calculates your score and generates a credit report.

Your credit report also contains public record information such as county court judgements, your information from the electoral register, and bankruptcy and insolvency records.

Notice that credit reports do not provide information about your salary or income. Your student loans, criminal record, driving fines, council tax arrears, medical history, or parking fines also do not appear on the report.

Is credit score and credit rating the same thing?

Credit scores and credit ratings are very similar. Both are systems that lenders may use to check your credit risk when you apply for credit. You may see the terms used interchangeably.

However, technically there is a key difference. A “credit rating” is usually given to a business or a government. A “credit score” on the other hand is normally used to grade the creditworthiness of individuals.

In both cases, an independent third-party rating agency will check your credit and create your score (not the lender themselves). 

What is a good credit score?

If your credit score or credit rating falls in the top third of the scale, lenders will normally consider this to be a good score. 

Credit ratings with numbers or letters  in the bottom two thirds of the system’s scale are thought to be risky.

For example, this means that lenders consider a credit score above 650 to be a good score. Credit ratings between BBB and AAA are also acceptable.

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