Credit reports. Credit scores. Credit reference agencies. You’ve probably of heard of them. You might even have seen them mentioned on lenders' websites while shopping for a loan. But what do they actually mean and how do they affect you?

We'll guide you through the credit jargon and help you understand everything you need to know about credit and credit reports.

What’s a credit check?

When you apply for any kind of credit, the lender will want to know if you’re able to afford the repayments. To give them an idea of how likely you are to repay, they’ll do a credit check.

If you apply for a credit card, mortgage or phone contract, the lender or supplier will ask if they can do a credit check. They do need your permission to do the check, so they’ll usually mention it in their terms and conditions or on their website.

Why do lenders do credit checks?

Basically, lenders are trying to work out how risky it is to lend to you. A low-risk borrower is more likely to make their repayments; a high-risk borrower is more likely to miss or stop making payments altogether. It makes sense for most finance companies to approve applications from people they see as being low risk.

When you apply for financial products online, the lender's system carries out a credit check as part of your application process. This allows lenders to look at your credit report.

What’s a credit report?

Your credit report contains information about you and your credit history. It shows lenders a detailed breakdown of your financial behaviour, which lenders use to decide whether or not you’re high-risk borrower.

Where does my credit report come from?

There are three credit reference agencies in the UK:

Each agency creates a credit report based on data sent to them by lenders. When you apply for credit and give them permission, the lender will ask one or more of the credit reference agencies for your credit report. You actually have more than one credit report because each agency creates their own.

When you accept a credit agreement, you’ll give permission for the lender to share your data with the credit reference agencies. They’ll tell the agencies how much you’ve borrowed, each time you make a payment and if you ever miss a payment. The agencies then use this data to update your credit report.

Why’s my credit report important?

Lenders use the data in your report to help them decide if they’ll approve your credit application. It doesn’t matter if you’re applying for a six-figure mortgage or a £200 loan. The information in your credit report will have an impact on the lender’s decision.

When will lenders look at my credit report?

Lenders only look at your credit report when you apply for credit. The process is called a credit search and it can only be done it with your permission.

What's in my credit report?

The bulk of your report covers details from credit agreements you’ve got now and any you’ve had in the past, plus your payment history. Other information in your report includes:

  • Name and address
  • Date of birth
  • If you’re on the electoral roll
  • Balances for your current credit accounts
  • Details of past credit accounts (for the last six years)
  • Payments records
  • Status of credit agreements (e.g. in default, still active etc)
  • Any missed or late payments on current or past accounts
  • Record of any county court judgements or bankruptcies
  • How many credit applications you’ve made over the last six months
  • Details of anyone you’re financially associated with (e.g. share a joint account with).

While it’s quite a long list, some important financial details aren’t included, such as:

  • Salary
  • Savings accounts
  • Council Tax arrears
  • Social housing rent payments
  • Parking fines.

How can I see my credit report?

Thanks to a handy bit of government legislation called the Consumer Credit Act (1974), you’re allowed to see the information the credit reference agencies have on you. You can ask any of the three for a copy of your Statutory Credit Report once per year. It just costs £2 and you’ll be sent the report in the post.

You can find each of the agencies online with free and paid options for looking into your credit reports. There are also free third-party services, such as ClearScore, that do a similar job.

What’s a credit score?

It can be easy to confuse the terms ‘credit report’ and ‘credit score’, but they are two different things. Your credit score is a number you’re given based on the information in your report. The more positive your borrowing and repayment behaviour, the higher your credit score. The higher your score, the more likely you are to be approved for credit.

Your credit score is never fixed. It can go up and down depending on a range of factors, including new credit accounts, missed payments and registering on the electoral roll. There’s no single formula or exact calculation. The three credit reference agencies use different methods and don't reveal their scoring system, so it’s almost impossible to guess by how many points your score will change.

Making regular payments to your credit accounts and keeping your personal details up to date are two ways to improve your credit score. On the other hand, your score is likely to go down if you miss payments or have a CCJ held against you.

What’s a good credit score?

It’s difficult to say. It depends on the type and amount of credit you’re applying for and the criteria the lender uses to calculate risk.

Using Experian as an example, they’ll give you a credit score from 0 (lowest) to 999 (highest). They then rate these scores from 'very poor' to 'excellent' with the following ranges:

961-999 = Excellent

881-960 = Good

721-880 = Fair

561-720 = Poor

0-560 = Very Poor

It’s important to realise there’s no magic number. Each lender makes their own decision using their own criteria based on the data in your credit report.

A score of 881 won’t necessarily guarantee an application approval, just as a score of 608 won’t necessarily mean you’re turned down for a phone contract. Your credit score is simply an indicator of how lenders will view your credit application.

Do I really need to see my credit report?

Your credit report is an important document, so it’s a good idea to look into it at least twice a year. It’s especially important to keep track of it if you’re trying to repair or build up your credit score. Remember, your credit report is a ‘living’ document, so it’s always changing.

By looking at your credit report, you’ll be able to see:

  • What lenders get to see about you
  • How your credit rating looks and how you might improve it
  • If your credit score is increasing or decreasing
  • If there are any errors that need fixing
  • If there’s anything suspicious that might suggest identity fraud.

Let's look these points in more detail…

See what lenders get to see

We know lenders make their decisions based on your credit report, so it makes sense to see what they see. You can look at where you are credit-wise and work out where you need to improve. At the very least, it might save you time making applications that are unlikely to be approved.

Improve your credit rating

We've already discussed how detailed your credit report is. Lots of factors add up to create your report and calculate your credit score. By studying your report, you should be able to see where you can change your financial behaviour to improve your credit rating.

For example, you can improve your rating simply by registering on the electoral roll. Or you might find small debts you’d forgotten about that are still affecting your score. Maybe the balance on your credit card is too high and working against you. You could see your credit score increase just by reducing the balance on each of your accounts.

Your credit report is always changing, so check it regularly. You’ll quickly be able to see if the changes you’re making to your financial behaviour are having an effect.

Increasing or decreasing credit score

Although lenders don't see your score as an actual number, it does give them an idea of how you are as a credit risk. If your score is high, you need to keep it that way. If it’s low, you need to work towards improving it.

Improving your credit score is all about changing your financial behaviour and reviewing your credit report to see if it’s working. If your credit score goes up, you’re doing something right. Simple ways of improving your credit score include:

  • Lowering the balances on your credit cards
  • Not missing payments
  • Reducing the number of times you apply for credit
  • Making sure you’re on the electoral roll
  • If your score is low, opening new credit accounts like low limit credit cards or short term loans
  • Reducing the overall amount of debt you owe.

Find and fix any errors

Mistakes happen, which means you might find incorrect information on your credit report. If this is the case, you should sort it out as soon as you can before it affects your credit score.

Common errors include:

  • New address not listed
  • Payments not recorded
  • Scheduled payments noted as late.

If your score drops too much, you could find it harder to take out credit in the future. You should report any mistakes in your credit report to the credit reference agency and the lender straight away. They will investigate and fix any errors.

Suspicious activity and identity fraud

Identity theft can be devastating. It can also go undetected for some time. By checking your credit report, you’ll be able to see if someone’s using your ID and put a stop to it.