Your credit score is one of the most important financial tools you have. It can affect your ability to secure loans, rent a home, or even land a job. Whether you’re just starting to build credit or working on improving an existing score, understanding how credit scores work and what factors influence them is crucial to managing your financial future. Here’s everything you need to know about your credit score and how to improve it.

What is a Credit Score?

A credit score is a numerical representation of your creditworthiness. It’s calculated based on the information in your credit report, which is maintained by credit bureaus. In the UK, the main credit reference agencies are Experian, Equifax, and TransUnion. Credit scores typically range from 0 to 999, and the higher your score, the more trustworthy you appear to lenders.

While the scoring systems can vary slightly between agencies, credit scores are usually broken down into the following categories:

• Very Poor (0-560): A score in this range may make it difficult to get approved for credit.
• Poor (561-720): You may still face challenges in getting credit, and higher interest rates may apply.
• Fair (721-880): Lenders may approve you for credit, but with conditions or higher rates.
• Good (881-960): You’re likely to be approved for most forms of credit, with better rates.
• Excellent (961-999): Your credit is in top shape, and you’re likely to get the best deals.

Why is Your Credit Score Important?

Your credit score is a reflection of your financial responsibility. Lenders, landlords, and even potential employers use it to gauge how likely you are to repay debts or meet financial obligations. A higher score means you’re considered less risky, which can result in lower interest rates, higher credit limits, and better loan approval odds.

On the other hand, a low score may lead to rejected loan applications, higher interest rates, or the inability to rent certain properties. That’s why it’s essential to understand what affects your credit score and how you can improve it.

Factors that Affect Your Credit Score

Several key factors influence your credit score. Here’s a breakdown of the most important elements:

1. Payment History (35%)
   Your payment history is the most significant factor in determining your credit score. It reflects whether you’ve paid your bills on time, including credit cards, loans, and utility bills. Missing payments or making late payments can lower your score significantly. Ensuring that all of your payments are made on time is crucial to building and maintaining a good credit score.
2. Credit Utilisation (30%)
   This refers to the amount of credit you’re using compared to your credit limit. Ideally, you should aim to use less than 30% of your available credit. If you regularly max out your credit cards or loans, it may indicate to lenders that you’re over-relying on credit, which could hurt your score.
3. Length of Credit History (15%)
   The length of your credit history accounts for 15% of your credit score. The longer you’ve had credit, the more data there is for lenders to assess your creditworthiness. It’s important to maintain old accounts (as long as they’re in good standing) rather than closing them, as a longer history can positively affect your score.
4. Credit Mix (10%)
   Having a mix of different types of credit, such as credit cards, loans, and mortgages, can be beneficial for your score. Lenders like to see that you can manage various types of credit responsibly. However, only take on new credit when necessary—don’t open accounts just for the sake of improving your mix.
5. Recent Credit Inquiries (10%)
   When you apply for credit, the lender will typically perform a hard inquiry (or hard check) on your credit report. Multiple hard inquiries in a short period can indicate that you’re looking to borrow too much money, which may lower your score. It’s important to apply for credit only when needed and to avoid making too many inquiries at once.

How to Improve Your Credit Score

Now that you understand what factors influence your credit score, let’s look at ways to improve it. The good news is that with some consistent effort, you can boost your score over time. Here are a few actionable steps to get you started:

1. Check Your Credit Report for Errors
   Mistakes on your credit report, such as incorrect payments or accounts that don’t belong to you, can negatively affect your score. It’s important to regularly check your credit report for errors. You’re entitled to a free credit report once a year from each of the main credit reference agencies. If you spot any errors, dispute them promptly to have them corrected.
2. Make Payments on Time
   Your payment history is the most significant factor in determining your credit score. Always try to pay your bills on time, whether they’re credit card payments, utility bills, or loan repayments. Setting up automatic payments or reminders can help ensure you never miss a due date.
3. Pay Down Debt and Manage Your Credit Utilisation
   A good rule of thumb is to keep your credit utilisation below 30% of your available credit. If your credit card balances are high, try to pay them down. Focus on clearing high-interest debts first, and avoid taking on more credit than you can handle.
4. Avoid Opening Too Many New Accounts
   Each time you apply for credit, a hard inquiry is added to your credit report. Too many hard inquiries can negatively affect your score. Only open new accounts when you truly need them, and space out applications for new credit over time.
5. Consider a Credit-Builder Loan or Secured Credit Card
   If you’re building or rebuilding credit, a credit-builder loan or secured credit card can be a helpful tool. These types of accounts require a deposit or a small loan, and they report your payment activity to credit bureaus. If you consistently make on-time payments, these accounts can help boost your credit score over time.
6. Avoid Closing Old Accounts
   Even if you’re no longer using an old credit account, don’t close it. A longer credit history is better for your score. Keeping old accounts open (and in good standing) can help improve your credit score by increasing the length of your credit history.
7. Settle Any Outstanding Debts
   If you have any outstanding debts or collections, try to settle them as soon as possible. Lenders and credit agencies view settled accounts more favourably than unpaid debts. While the negative mark may still appear on your report, having a paid-off collection account can help improve your overall credit profile.

Conclusion

Understanding your credit score and the factors that influence it is the first step toward improving your financial health. By maintaining a good payment history, managing your credit responsibly, and regularly checking your credit report for errors, you can increase your score over time. Improving your credit score may take patience and effort, but the rewards—better loan terms, lower interest rates, and increased financial opportunities—are well worth it. Start implementing these strategies today to build a strong, healthy credit profile for the future.