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Know Your Borrowing Power: Credit scores explained

Man sat at his computer thinking about his credit score

When it comes to borrowing money, it can be difficult to know you’re getting the best deal available to you. That’s why we created Borrowing Power. It gives you a 1-10 Zopa rating that gives you a clear picture of your financial health, along with tailored recommendations of how to improve if it needs a little TLC. Even better, it shows you which rates you could borrow at with Zopa, and the rates you could unlock if you manage to improve your Borrowing Power. Representative APR 9.9% 

Lots goes into calculating that rating, so we’ve asked Laura Whateley, award-winning financial journalist and author of Money: A Users’ Guide, to explain some of the key factors that affect it. 

If you were to lend someone a significant amount of money, you’d want a rough idea of how likely they were to repay you, right? So it makes sense that seeing whether they have repaid other people on time in the past would be a good guide.  

Banks and companies that lend consumers money are no different, they want to know you are a decent bet. This is where credit scoring comes in. 

Lenders will look to see how you have managed any debt in the past when making decisions about whether to lend to you, and how much you borrowed and at what rate.  

How your credit score is worked out 

Banks and lenders each have their own way of scoring you, it’s an unfortunate myth that you have just one credit score but, frustratingly, you will never find out what each bespoke method is. All you will know is whether or not you are accepted for a loan or credit card, and how much you will have to pay in interest. 

What you do have is a credit history or a credit file. This is a record of your address details and all your previous financial transactions, what bank accounts you have, for example, any credit cards or car loans, mobile phone deals or mortgages.  

These records are kept by the UK’s three credit reference agencies: Experian, Equifax and Transunion. Each credit reference agency will offer you a score, but that is their own judgement based on your file, it is a guide, not a guarantee of how a lender will see you. 

It is a useful way to get an idea of how likely you are to be able to borrow, though.  

Improving your credit score 

If your score looks on the low side, it is worth trying to improve your credit history and there are lots of things you can do. 

1. Register to vote 

Most important is to get on the electoral roll. Lenders will use this to confirm your identity, and check that you are who you say you are. You are unlikely to be accepted for a loan if your address on your credit history, or the address where you’re applying for a loan, doesn’t match the address where you are registered to vote. 

2. Get on top of your debt…

Being in lots of unmanageable debt (see our credit utilisation blog for more on this), using payday loans or failing to pay bills on time can damage your score, missed payments stay on there for six years. 

3. … but make sure you have some debt

Lots of people find that they have a poor credit score not because they have too much debt, but because they’ve not had enough. This is known as having a “thin file”, and is a bit of a chicken and egg situation. Lenders want to see that you are able to handle debt well, but they can’t if you have never had any credit products before. Taking out a credit card, using it sensibly and paying it off in full each month, will help boost your score.  

4. Look at your relationships 

Your credit score could also be damaged by other people. If you have any joint financial products with a friend or partner their credit history is linked to yours and if they are less than brilliant at clearing their overdraft, you could be impacted. Just sharing a flat with someone doesn’t mean your histories are linked, but if you still have an old joint account with an ex-partner, make sure you close it down and disassociate yourself.  

5. Don’t apply for too many products 

Like lovers, however, banks also like you to play things a bit cool. Be cautious about applying for too many financial products in a short space of time, or you will look desperate for loans and not great at managing your money. Same rules apply as when you’re looking for a new partner…. 

6. Check your credit file is accurate 

Checking your credit file regularly can help you spot any mistakes or possible fraud on any of your bank accounts. If there’s anything on your file you are unhappy with or would like to explain, for example, that you missed a bill during a period of illness or unemployment, but you are now back working and always clearing debts on time, you can add a notice of correction. The aim is to make sure all lenders see the absolute best version of you before you ask to borrow money. 

Laura Whateley is a freelance writer and author of Sunday Times bestselling book Money: a user’s guide. She has written for a wide variety of publications including The Times, The Guardian, Grazia, Refinery 29, Elle and Stylist Magazine. All views are Laura’s own.