Understanding credit scores

Couple sat on sofa looking at their phone and laptop

Checking your eligibility for credit and understanding your credit score can be pretty confusing. The Aro Understanding Credit Scores guide can help you come to grips with how your credit score works. You’ll also discover how to boost your credit score.

What’s a credit score?

A credit score is like a point system made up of your financial history. This score is used to tell lenders if you’re eligible for a loan or credit.

How is my credit score worked out?

Your credit score is calculated using information based on any credit applications you’ve made from your current or previous addresses, any history of debt, including any County Court Judgements (CCJs), Individual Voluntary Arrangements (IVAs) or bankruptcies. It also shows how you’ve maintained repayments to your credit cards, store cards, loans and mortgage.

Why is my credit score important?

Lenders use your credit score to decide if you’re eligible for credit, as well as what APR (Annual Percentage Rate) you’ll qualify for. If you have a good credit score, you’re more likely to be offered better rates and be accepted for a wider range of products. To lenders, you’re considered low risk.

If previous financial difficulties have left you with a poor credit score, then it could be tricky obtaining credit in the future. You’ll also be considered higher risk by lenders, so it is more likely any borrowing will come with higher interest rates.

If you have a low credit score, you may need to consider alternative borrowing options. Check out this quick guide to your loan options if you have a poor credit history.

What is a credit footprint?

Every credit and loan application leaves a footprint, which lenders use to build up a picture of you as a borrower. And when you receive credit or a loan, you make a footprint based on how you manage your repayments.

If you miss loan or credit card payments, this suggests you are less able to manage your finances, so it will have a negative impact on your credit score. History of County Court Judgements (CCJs), Individual Voluntary Arrangements (IVAs) or bankruptcies will also damage your credit score.

Is my credit score all that matters?

Your credit score isn’t the only thing that lenders look at when you check your eligibility for a loan or credit. Different lenders use different criteria to decide whether to lend to you, building up a picture of you as a borrower based on the information they have. So it’s not just your credit score that matters, but also any history you have with the lender as well as the information you provide when you check your eligibility.

Understanding credit score risk

Credit scoring works by trying to predict how you as a borrower will manage your loan or credit in the future. Your score then indicates to lenders how risky a borrower you are based on your borrowing history. It also gives an indication to lenders whether you’re a vulnerable customer. If the lender looks at your credit score and thinks that lending to you might give you future financial problems, they won’t offer you credit.

Don’t appear desperate

Every time a person makes an application for a loan or credit, it’s recorded on their credit file for a year. So it’s sensible to plan ahead and prioritise loan or credit applications rather than just repeating the process. Too many credit applications over a short period of time can result in rejection. This is because it can signal to lenders a number of possible issues, including potential fraudulent activity and applicants applying for more credit than they can afford.

In contrast: Buy Now Pay Later is one situation (where successful) that you can’t put on a credit file.

Handling rejection

So, you’ve got the perfect credit score, yet you’ve still been rejected. Why? Well, credit scoring doesn’t simply mark borrowers as high or low risk. It’s much more than that.

It could be something as simple as incorrect details on your report. Make sure you go through your report and double check they have all the right information.

Don’t be disheartened. Every lender has a different scoring system so it doesn’t mean next time with another lender will automatically reject you. Just remember to not make too many credit applications close together as this also can lead to rejection.

We’ve all got history. Or have we…?

It’s not just a poor credit history that can count against you. Many people are surprised to discover that having no credit history is also a problem. Lenders can be wary of borrowers with no history, because they have no information to base their risk assessment on. So it may be a good idea to start building one.

In need of a credit score boost?

There are things you can do to build up a good credit score. It is a good idea to check your credit file annually or before checking your eligibility as lenders will review your file prior to making a lending decision.

It’s also worth making sure you’re registered on the electoral roll at your home address, and that your credit reference file is up to date. There are also credit builder cards available on the market for those with a poor, or no credit history. You can use the card to pay for your usual monthly purchases to build up your score. Just remember to repay in full each month so you don’t pay the high interest rates.

Just remember to repay the balance in full every month. Otherwise you’ll find yourself not only paying high interest rates, but this could also have the opposite effect and negatively impact your credit score.

For more useful information on boosting your credit score, read​​ our handy guides.

Share this page

Recommended Guides