Managing your credit score is something that everyone needs to take the time to do.
Not only does your credit score affect your ability to get credit cards, loans, or obtain a mortgage, your score might impact whether you can get a mobile phone contract, a new current account, or a monthly car insurance policy. With this in mind, knowing how to improve your credit score couldn't be more important.
So, what should you know about your credit report, credit checks and how to improve your credit score before you start applying for credit? Here, we'll give you some helpful advice and information.
Before we look at how to improve your credit score, let's look at why it's so important.
Whenever you apply for new credit, lenders will look at your credit history and work out your credit score. This will then allow them to assess your creditworthiness and decide whether or not you're too risky to lend money to.
Usually, your credit score will be calculated based on the following factors:
Information obtained from your credit report.
The details on your credit application.
Any data that they already have about you if you're a previous customer of theirs.
All lenders may have different ways of working out your credit score. It will depend on the information they can access and their individual lending criteria that will determine your credit rating with them.
A good credit score will show lenders that you represent a low risk. This means that when you apply for credit, you've got a better chance of being approved for new cards and loans as they can judge from your previous personal finance behaviour that you're very likely to pay back the money you're borrowing. A high credit score suggests that you can manage credit sensibly and will pay on time.
The benefits associated with improving your credit score include:
Being offered lower interest rates so borrowing will be cheaper. Interest rates will vary depending on your credit rating, so if you increase your credit score, there's a good chance the rate you'll be offered will be more favourable.
Higher credit limits.
The opportunity to borrow more money.
Access to a wider variety of offers.
A better chance of being approved for new credit cards, loans or other lines of credit.
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Credit reference agencies also work out their own version of your credit score. There are three primary credit reference agencies in the UK - Equifax, Experian and TransUnion and all are authorised and regulated by the Financial Conduct Authority. Each uses its own system to determine your credit rating, so your credit score will differ depending on which credit reference agency your prospective lender chooses. Also, all three credit reference agencies have their own criteria of what a good credit score looks like.
All of the CRAs hold a range of data about every individual, including:
Whether they're on the electoral roll.
Whether they have ever had a county court judgment or a decree issued against them.
Any IVAs (individual voluntary arrangements) they have.
Whether they have ever been bankrupt or subject to any other type of court order that indicates a history of financial problems.
Not only that, but they also hold details about other lenders that have checked your credit file when you've made a loan or credit card application, as well as hard credit checks carried out by major electricity and gas companies.
As well as all this, the CRAs hold information about all your account behaviour on all your credit cards, store cards, mortgages, loans, energy bills, bank accounts and even mobile phone contracts dating back for six years.
Full data is shared with the CRAs by some lenders. This will incorporate information about how your account is generally operated, including any missed payment you've had and even the amount of money you're spending on credit card payments - whether you're repaying in full or only making the minimum payment.
With this in mind, it makes sense to check your credit report regularly to see how your credit rating is shaping up. Equifax, TransUnion and Experian credit reports can all be reviewed by individuals as well as by lenders.
You can check your credit report for free to see how lenders may view you, and this will give you a good idea about whether it's worth applying for credit or whether you need to improve your score first. There's no need for concern - if you check your credit score yourself, there won't be any negative repercussions. It won't affect your credit score in any way.
So, now that you know why you should boost your score as much as possible, how do you go about doing it? Here are some top tips.
The easiest way to do this is to make sure you are registered in England and Wales, Northern Ireland or Scotland on the electoral register. You can register to vote and be on the electoral roll no matter where you live, whether that be with your family or in shared accommodation. Your current address needs to be verified on your Equifax, TransUnion or Experian credit report so that lenders can be sure that your credit applications aren't fraudulent.
Some people are under the misconception that if they never get a credit card or loan or never apply for any credit, they will have positive credit scores. Unfortunately, this isn't the case. In fact, if you've never or barely had any credit in your financial history, it's extremely difficult for lenders to assess whether you're a risk. Your credit file will lack valuable information, and this could mean your credit scores are poor.
Many young people have this problem, as well as people who've only recently moved to the UK. Luckily, lacking information on your credit report isn't an insurmountable problem. You can work on building up a positive credit file over time and thus boost your credit score.
How can you do this?
Firstly, you need to always pay every payment on time. Making regular and timely payments is a great way of proving to lenders that you can borrow money reliably and pay back what you owe responsibly. Old accounts that have been well-managed will typically boost your score, so if you always pay your bills on time and in full each month, you'll be on the right track to improve your credit file. Remember that any missed payments will add up to bad credit, and even a single missed payment could cause your score to drop.
Next, keep your credit utilisation as low as possible. This means using only a small percentage of your available credit limit on your credit cards. Whenever possible, try to keep the percentage of your credit card limit that you use down to less than 25%.
The Experian credit reference agency also offers an instant score boost by allowing individuals to securely connect their current account to their Experian account. This allows Experian to check bank transactions for evidence of responsible financial handling - for example, payment of council tax, Spotify and Netflix bills on time or making payments into an investment or savings account.
If you have financial links to another person, their file can be considered when your own credit file is being assessed. This means if you have a financial association in any way with somebody who has had money problems, county court judgments and missed payments, it's likely that your credit will be affected too.
The key to resolving this is to ensure your finances are always kept separate, and if you have any financial links with someone who is no longer in your life, you should contact the CRAs for a notice of disassociation.
There's a bit of a catch 22 situation when it comes to making an application for credit. You'll only find out if you're accepted if you apply, but that means a hard credit check on your file. If you have multiple credit checks over a short space of time, this could harm any future applications.
You can get around this situation by using a credit eligibility calculator, which uses soft searches rather than hard ones to determine whether you're likely to be accepted for loans or cards. This will help you to decide which ones you should apply for and help avoid your credit score going down.
One of the reasons you need to check your credit report regularly is to spot any unfair defaults. If you find one, you must dispute it.
Sometimes, these occur because of clerical errors, but sometimes they've been put there by the lender in error. If the error is a clerical one, the CRA will usually be helpful and remove it. If it's the lender's error, you should first write to them asking for the default to be removed and listing the reasons why. Should this fail, you can then add a Notice of Correction to your credit report file. This should explain the problem factually and concisely.
If you only require a quote for a credit card or loan, you can ask for a soft (quotation) search instead of a credit search. This won't impact your score.
When money is tight, many people choose to pay their insurance costs in instalments each month. But if you do this, you will not only end up paying more money for your cover in the long run, but you'll also be potentially affecting your credit rating. Some providers charge an APR of as much as 40% for monthly paying customers.
If your credit rating is poor, you can rebuild it by taking out a credit rebuilding loan or card. As long as you operate this account wisely and make your repayments on time and in full, you can make huge steps towards repairing your file.
Many people try to save money on their bills and financial products by using a comparison site. Rest assured, this will have no negative effect on your credit score. The searches carried out are all soft searches, so other lenders won't see them.
Although a lot of information is included on your credit reference file, there's a lot of data that isn't. For example, your ethnicity, religion and race aren't included, and neither is your salary. No information is reported about savings accounts, and your medical issues aren't listed. Even your criminal record isn't disclosed.
Some other data that isn't shown include:
Any soft search that has been carried out
Your actual credit score in figures
Any student loans (post 1998)
Any driving fines or council tax arrears
Who you live with or are married to if you have no financial links
Any defaults or discharged bankruptcies from over 6 years ago
Any declined applications
Any attempts to reclaim bank charges or PPI
Your credit file will dictate which product (if any) you'll be offered as well as the rate you'll receive, so it stands to reason that you need to keep on top of your score at all times. You can read more about your credit score and how to improve it here. If it needs improvement, get working on it immediately, and once it reaches a level that you're happy with, try as hard as you can to maintain that good score for as long as possible.