Are credit scores the ultimate scam?

What’s your number?” There’s little that’s scarier than this seemingly innocuous question. And no, I’m not talking about how many people you’ve slept with. I’m talking about your credit score.

The topic hadn’t once crossed my mind in 34 years until, overnight, it commandeered my every waking thought.

I was trying to buy a house, you see. And when buying a house, you usually need a mortgage. And when applying for a mortgage, the number that sums up how “risky” you are to lend to suddenly becomes very important indeed.

Not having considered it before, I blithely assumed I would have an excellent credit rating. How could I not? I paid my rent and bills on time every month; I wasn’t in debt; I had one credit card that I spent a couple of hundred quid on each month and automatically paid back by direct debit. But it wasn’t “excellent”. It wasn’t even “good”. It was at the lower end of “fair”. During the endless months of house hunting, I checked it obsessively. Why had it gone up by 10 points? Down by 20? It was like trying to crack the enigma code; there seemed to be no rhyme or reason behind any of it. Then, one day – soon after I’d had an offer accepted on a house – I saw it had dropped to “low”. I immediately burst into tears.

This particular dip appeared to be a result of my taking the innocuous step of starting a new phone contract. The mobile provider had run a “hard” credit search on me – which involves a review of someone’s credit record, often impacting their credit score – and this search in itself had knocked precious points off my number.

I did eventually get a mortgage, but my credit score did put some limitations on the options available to me – and for an anxiety-filled, 10-month period, I felt held hostage by this mysterious number that I had no control over.

I wasn’t the only one in the dark. Research conducted by specialist bank The Mortgage Lender suggested that Brits have a limited understanding of credit scores: nearly two-thirds (62 per cent) of the 2,000 UK adults surveyed said they didn’t know their credit score. Poor credit scores have deterred one in 10 of us from applying for a mortgage.

So first up, what is a credit score? And how are these seemingly arbitrary numbers decided upon?

“Credit scores are records that demonstrate to a future lender how good you are at repaying money that you’ve borrowed,” says Maxine McCreadie, a personal finance expert at UK Debt Expert. “Usually your credit score will be displayed as a three-digit number and the higher your score, the more likely you are to be accepted when you apply for credit, like a credit card or a loan, as well as a mortgage or mobile phone contract.”

There are three main credit reference agencies (CRAs) in the UK – Experian, Equifax and TransUnion – which gather data about you and your past use of credit to produce a credit file in your name. This includes information about you from the electoral roll; how you’ve used and repaid consumer credit (loans, overdrafts, credit cards, mortgages and mobile phone contracts); any court records against you to do with debt, such as County Court Judgements (CCJs); details of other lenders who have searched your file; and any “financial associations” (details about other people you’ve had a credit agreement with). In addition, using a “buy now, pay later” service like Klarna will now show up on your credit file in the UK, and can be detrimental to your score.

What’s confusing about all this is that you don’t just have one “absolute” score; each CRA has its own secret methodology when it comes to calculating ratings. Your number and band (low, fair, good etc) could be different across each one – it was for me during my property search – and lenders will have their own preference of which one they consult when deciding whether or not to loan you money and at what rate.

“No credit agency will tell you exactly how your score is made up,” says Tim Rooney, CEO of Salad Money, a specialist consumer lender set up to lend to people in employment who have either no credit score or impaired scores but sound finances. “They will tell you about the components which add towards it, but not the exact weighting.”

You can find out your score for free by signing up with any or all of the three CRAs – though you’ll have to pay for their services if you want a proper breakdown of the contributing factors behind your number. Forget the myth that checking your score can lower it – the agencies perform a “soft”, rather than a “hard”, check on you, with the former just providing a view of your credit eligibility.

Crucially, your credit score is “not indicative of your financial health”, Jason Butler, a financial wellbeing expert, tells me. “A high credit score doesn’t mean you’re good with money. And you could have a low score and be perfect with money. But there’s this myth that if you have a bad credit score you’re scum of the earth, you’re a loser – and it’s perpetuated by the finance industry, particularly banks.”

One of the issues with the current system is that it can unfairly disadvantage those who are so careful with money that they’ve never spent what they don’t have by, for instance, taking out a loan or using a credit card.

“It is true that a limited credit history could have a negative impact on your credit score,” says McCreadie. “Lenders want to know that you can be relied upon to repay any debts and the most common way to show this is by repaying a credit card on time and in full every month. It’s important to note that these scores are a record of your likelihood to repay debts, rather than a general measure of your financial health.”

She warns that, as much as a limited credit history could be a barrier to some forms of credit, a poor score caused by being unable to manage multiple debts “could do much more damage”.

An element that can have a huge impact on your number is what’s referred to as a “delinquency” – a missed payment, such as a utility bill, in layperson’s terms. “Any missed payment will create a marker which remains on your credit file for six years,” says Rooney. “We think this is disproportionate: a small mistake from a few years ago, even if you rectified it, can affect your ability to borrow for many, many years.” Salad Money is not alone in thinking this: the UK’s financial regulator, the FCA, said in its Credit Information Market Study interim report that the traditional approach to credit information doesn’t work well for many under-served consumers, of whom there are currently an estimated 20 million in the UK.

Rooney adds that it’s “lopsided and unbalanced: ‘bad’ behaviour has an almost immediate impact but ‘good’ behaviour takes a long time to have an effect on your credit file”.

What can feel even more unfair is when a person is hit by an unexpected life event that has a devastating effect on their finances – such as an illness or bereavement – and finds themselves penalised by the system.

Zak, the managing director of a software company in Chesterfield, fell victim to this when his circumstances changed due to cancer. “I’d always been a self-sufficient and reliable person, and when it came to finances, I’d pride myself on being responsible and living within my means,” he says. “When I was young, I worked day and night. I liked feeling independent and building a life for myself. At 18 I managed to buy myself a house. And then the unexpected happened, and I was diagnosed with Leukaemia.”

Upon receiving the terminal diagnosis, Zak understandably focused on his health rather than the financial chain reaction his illness would set off. “Over time, with all the chemo, drugs and treatments, I was effectively fired from my job, which meant I lost my income, and despite my best efforts, struggled to cover basic bills like gas and electricity. I remember being in my hospital bed speaking to NatWest, who I had my mortgage with, trying to negotiate a payment holiday because I didn't want to lose the house. I didn’t realise at the time but taking a payment holiday is deemed as a default… my credit score plummeted to zero.”

The situation caused a huge amount of stress for Zak and his family; although the treatment worked and he went into remission, he “was left with an abominable credit score which would last on my record for six years”.

“Credit scores don’t take into account personal history or recognise the diversity of the human experience,” he adds. “When you default on a payment, they don’t investigate the circumstances that contributed to that. They don’t ask if you have serious health issues or if there’s a genuine, unavoidable reason. It’s yes or no.”

Zak, who is now a Salad Money customer, said his experience highlighted a “deep flaw” in the credit system that he hadn’t previously been aware of. “I think whoever designed credit scores didn’t know a thing about real life,” he says. “Financial services need to be more empathetic, considering each individual case, not just the numbers.”

The important thing to remember is that you are not your credit score – and unless you’re applying for a mortgage or loan, that number has very little bearing on your life. As consumer guru Martin Lewis recently said on an episode of his ITV show, “Your credit score, that credit score you get, doesn't really mean anything. Those credit scores are just a loose indication, small movements don't really mean any changes.“

“The only reason to be concerned about it is if you want to buy a house,” agrees Butler.

Although there are some simple ways to up your number – ensuring you’re on the electoral roll, keeping an eye on your score across the three CRAs and reporting any errors on your file, making payments on time, cancelling unused bank accounts, using eligibility calculators before applying for further credit, and not utilising your entire limit on credit cards each month – Butler’s top advice is to focus your energy on other good, robust financial practices.

“Put more time into the basics: building a cash emergency fund, growing your income, spending less on crap you don’t need, avoiding borrowing money like the plague,” he says. “Your credit score is just one of a number of factors; focus on the core fundamentals instead.”

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