The five basic components of a credit score

By Jemma Porter

What is a UK credit score?
When applying for any form of credit such as a loan, overdraft, mortgage or credit card, lenders will often refer to your UK credit score -- provided by credit rating agencies -- to assess how much of a risk you pose to the creditor.

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There is not one universal credit score in the UK, meaning that being rejected by one lender does not automatically make you ineligible to another. There are many different components to a credit score, too, with each having a different impact upon the rating. Credit scores in the UK range from 0 to 1,000.

If you want to know your credit scores and check your credit reports, you can visit one or all three credit rating agencies in the UK -- Experian, Equifax or Callcredit. You pull a snapshot of your current credit history from all three agencies for £2, called the Statutory Credit Report, but your credit score will cost you a bit more (£14.95 from Equifax, for example), depending on the agencies.

Credit scores explained
Most credit scores are calculated based on the following five components:

Repayment history
Your repayment history comprises 35% of your score and reveals to lenders how reliable you have been at making repayments in the past.

The lender will look at a wide variety of debts and contracts such as loans, overdrafts, mortgages, store cards, insurance and mobile phone bills. Lenders rely heavily on a consumer's repayment history as it is often used to predict the borrower's behaviour in the future. For example, if an individual has never missed a payment in 20 years, unless something unexpected happens, it is unlikely that he will start making regular late payments.

If you have a poor UK credit score and are looking to improve it, one of the best ways is to ensure that all your repayments are made on time or early.

Utilisation ratio
Your credit score measures how much outstanding debt you have in comparison to the amount of credit available to you into consideration. This is known as your utilisation ratio, which comprises 30% of your score.

Individuals with numerous credit lines that are all completely maxed out provide an image of someone who is unable to manage their debt responsibly.     

Individuals with numerous credit lines that are all completely maxed out provide an image of someone who is unable to manage their debt responsibly. This is not something that a lender is looking for in a borrower, and will likely have a negative impact on your credit score.

To appear as a reliable borrower, the utilisation ratio should be kept as low as possible at all times, in fact experts recommend keeping it between 30% and 40% where possible. Maintaining a low utilisation ratio applies to individual lines of credit and the total debt.

As an example, a consumer with two credit cards with £5000 limits should not have outstanding balances of more than £1500 on each card. The individual should also not have outstanding debt of more than £3000 overall.

Length of credit history
The longer the record of good credit history, the better your credit score will be, making it almost impossible for young people or those new to credit to achieve a good credit score range right away. Length of credit history comprises 15% of your score.

A long credit history makes it easier for credit rating agencies and individual lenders to see how well you have managed credit in the past. As well as taking the history into account, lenders will look at the amount of time and activity since the applicant's first credit account, and the recent enquiries to the report.

If consumers are looking to improve their credit score they should start by applying for credit-builder accounts available with prepaid cards and bad-credit credit cards. These usually have higher rates of interest and lower credit limits, but they help individuals start their credit history. However, applying for too many lines of credit in a short space of time is a problem as it suggests that applicants could be in financial difficulty.

Mix of credit
It is always a good idea for borrowers to vary the types of credit they obtain, as this demonstrates to lenders that they are able to hand a variety of debts. Therefore, having a couple of credit cards, a loan or a mortgage over time will be more beneficial to your credit score than having 10 credit cards. Your credit mix accounts for 10% percent of your credit score.

New credit
Again, refrain from applying for too many loans or credit cards at once as each application will ding your credit score. Space out new credit applications over a series of months rather than weeks to allow your score to recover from each credit inquiry (lenders will typically check your credit score before extending you money to determine what type of borrower you are). New credit also accounts for 10% of your credit score.

Improving credit score numbers
The best way to improve your credit score is to always pay your bills on time every time. Keep your credit utilisation low, and vary the types of credit extended to you. If you've paid late in the past, it will take some time for your credit score to recover. If you want to improve your score, start by contacting a credit score check company to find out your credit score numbers.

See related: A visual guide to your credit rating; 5 secrets of credit score overachievers

Published: 8 December 2011