Martin: The truth about credit scores
Seven need-knows to become more irresistible to mortgage, credit card, overdraft, loan, mobile contract providers & more

There's a lot of nonsense spoken about credit scores - the biggest being that you actually have one. You don't! Yet the rising cost of living has left fiscal bags under many eyes. Worse, the Catch-22 is less disposable income makes you less attractive to lenders, making acceptance for top financial products tougher, which adds to your costs. Rinse & repeat.

That means it's crucial to understand how creditworthiness works and how to manage & boost it. Among many other things, the free MSE Credit Club gives you a personal assessment (or it's even easier to join & use via the MSE App on Apple or Android), so look at that in conjunction with my 7 need-to-knows below.

1. You DO NOT have a credit rating or credit score. In the UK, there's no single number that dictates whether a lender will accept you. Each does its own credit score based on its specific wish list of what makes a profitable customer. Usually, profitability correlates to low risk, but some specialist lenders see higher risk, and therefore higher rate, as profitable.

• 'What you talking about? I've paid for a credit score!' Each of the three big UK credit reference agencies gives you its 'credit score' - but that's not an official thing, it's just their view of how a typical lender may see things - a useful indication (get one free in Credit Club), but it's neither definitive, nor used by most lenders - the fact each agency gives a different score illustrates that.
  
  
• So, don't sweat small 'credit score' changes. I often hear: "My score's dropped seven points because I did x, y or z. Help." In reality, it's pretty meaningless, there's an element of art as well as science, so don't try to micromanage it (yet do take note of big falls) as each lender is different.
  
  Eg, close a credit card and your score may rise as you've less available credit, yet it makes you less attractive to some lenders as they like signs of product longevity.

2. Your credit FILE does matter - check it for errors at least annually, and before any big application. Credit reference agencies' files - aka credit reports - contain much of the data lenders use to assess applications including electoral roll info, your credit products and whether you pay them on time, court judgments, and more (but not speeding points or criminal records, see what credit reference agencies know about you). Check yours regularly, line by line.

For a general check, you can just look at one agency, as the data is usually similar, but check all three before a major application. Full info in free credit reports (including how to get cashback when doing this) but in brief...

a) Free TransUnion file & score: Via MSE's free Credit Club (which also shows you how to get the other agencies' files too).
b) Free Equifax file & score: Via Clearscore*.
c) Free Experian file: Use Experian's basic statutory file. It's closed down all the bells & whistles free options, however newbies signing up to its CreditExpert* service get their file & score free for a month, after that it's £15/mth so be ready to cancel.

When you're checking, look for any error, even a simple error, such as an unused, but still open, credit card account at the wrong address, or a default unfairly marked as paid late, as these can torpedo future applications - see how to dispute defaults.

It's worth noting, as well as your file, lenders will also look at any past dealings you've had with them. So a lender you've banked with knows you better. If it's good, applying there can boost acceptance. And your application form information is also used, including your income.

3. A perfect credit score DOESN'T mean acceptance, instead check your Credit Eligibility Rating. Credit scores miss the key information lenders look at... your income. Someone with a good credit history won't get a £200,000 loan on a £10,000 income, as they'd fail on affordability.

So, earlier this year I designed a new measure, your Credit Eligibility Rating, available as part of the free MSE Credit Club (link takes you there, or easier, go via the MSE App), to solve that. It combines the THREE crucial real-world factors that dictate whether a lender will accept you...

a) Your credit score from TransUnion: One of the big three.

b) Your MSE Affordability Score (see your Affordability Score separately too): Lenders use the income on application forms to work out your affordability based on income & outgoings. So we've mimicked what they do in our Affordability Score.

c) Current market conditions: To ground the Credit Eligibility Rating in the real world, it also looks at how easy it is currently to be accepted (meaning your rating can change when your situation doesn't, simply as acceptance overall has got easier or harder).

Which of these matters most is product-dependent. Credit history is weighted heavily in credit card acceptance, as with a good history but poor affordability you may still get a card, just with a low credit limit. While loan acceptance is weighted towards affordability, as you specify the amount to borrow, so poor affordability may lead to rejection, especially for bigger borrowing.

4. The trio of measures lenders assess you on. First a graphical overview, then the detail...

A) Debt ratio: the percentage you owe compared with annual income. This is generally for unsecured debt such as cards & loans (so not mortgages). Eg, £10,000 of credit card debt on a £40,000 income is 25% on the debt ratio scale. In general, the lower the debt ratio, the better.

So, to try and improve it, pay down any debt if possible (or increase your income, though if you could you'd probably be doing that anyway). Yet as a quirk, at the very low end, lenders do like to see some debt used, so they can see you're doing it responsibly and paying it off - meaning a debt ratio under 1%, especially if with little data, can be negative.

Though often just having a cashback credit card paid off fully each month counts as debt - as at the date lenders report to the agencies, there can be some debt on it - so that's an easy way to do it. Conversely, if your ratio's too high, that means if you have a card you clear each month, best not to use it at all in the couple of months before a big application.

B) Credit utilisation: the percentage of available credit you currently use. Eg, if you've spent £100 on a credit card and you've got a £1,000 limit, that's 10% credit utilisation. Again, lower is better.

How significant this is depends on your debt ratio. If your utilisation is high, but debt ratio low (so you're using most of your credit, but it's only a small part of your income) it's unlikely to be a big deal. Yet if it's a significant chunk of income, it matters.

To cut it, again pay off some debt if possible. Perversely, technically, you could also cut it by getting a credit card and not using it (as it increases your credit) yet it's unlikely to make the difference between acceptance or not, so I wouldn't bother.

C) Disposable income: the percentage of spare cash left over each month after essentials. This time, higher is better. Essentials include housing costs, debt repayments, and other bills you and your dependants must pay. As for how to improve it, other than increasing income, it depends...

5. With mortgages what you actually spend matters, with credit cards and loans it often doesn't. For affordability scoring, they know your income but also need to know what you spend.

With mortgage applications, lenders look at your personal disposable income - so going frugal in the lead-up helps (use the MSE Credit Club mortgage affordability tool to see how much you may be able to borrow).

However, with cards and loans, lenders look at statistical modelling for what disposable income somebody in your situation is likely to have, rather than what you actually have - so frustratingly going frugal doesn't usually actually help.

6. The top cards to (re)build your creditworthiness. The two big reasons people get rejected for credit are:

- Their history makes them look a bad credit citizen, or
- There's not enough data on them. After all, would you lend to someone you knew nothing about, even if all seemed good?

In both cases, the best thing to do is get some borrowing and - carefully - use it well. In other words...

You need credit to get credit, but how do you get credit when you don't have credit? 

Our Credit (re)Build Card Eligibility Calc lists easier-to-get fee-free cards designed for this, with high interest rates (to avoid these, always follow the instructions below).

Top cards include some that reward spending such as the Tesco Foundation card*, which gives Clubcard points on spending, but is 29.9% rep APR if you don't fully repay, and Asda Money, which gives 'Asda Pounds', but is 34.9% rep APR if you don't fully repay. Yet it all depends on acceptance, so use the eligibility calc, which includes most cards (though not Asda).

How to use these to maximum impact & minimum cost...
- Do £50 to £100/mth of normal spending on it.
- Repay IN FULL each month, preferably by Direct Debit. That way there's no interest (if you fully clear the balance, there's no charge).
- Never miss a repayment, or withdraw cash, or bust your limit.
- After up to a year or so, provided you never miss a payment (and don't have issues elsewhere), your creditworthiness should improve.

7. Student loans don't count as debt on your credit file. When I write about loans above, this doesn't include student loans - while in some very rare default circumstances they can go on credit files, they don't usually.

In practice, as I often say, student loans work more like a form of additional graduate income tax. And that's how lenders view them. It's not an issue of creditworthiness.

Yet this doesn't mean there's no impact. Instead, just like if taxes rose, repaying a student loan reduces your disposable income, and that's how it feeds into lending decisions.