Your credit score is one of the most important things in modern financial planning.
The issue of getting a good credit score can be a minefield to navigate, especially as the importance of building up good credit is often not something well explained to young people when they set out to be financially independent.
For instance, having no credit history can be as bad as having a poor credit score. This is because lenders don’t have any historical information about how you manage your money, making it harder to assess your level of risk.
Nowadays, you can check your credit score for free through websites like Noddle and Clear Score, something you should do regularly to stay up-to-date on your report’s status.
You also have the legal right to see a copy of your credit report for £2, and you can request this from any credit reference agency that holds information on you.
What information is in a credit report?
Each agency holds slightly different information about you, so it’s worth checking all three for a more accurate picture.
In general, your file will include:
• Name, address and date of birth
• Some search footprints on your file, such as credit applications
• Financial links to other people – for example, a joint loan or bank account
• Any late/missed payments or defaults
• How much money you owe to lenders
• Any County Court Judgments (CCJs) against you
• If you’re on the electoral register at your current address
• If you have been declared bankrupt or entered an IVA (Individual Voluntary Arrangement).
It won’t include the following information:
• Your salary
• Student loans
• Medical history
• Criminal record
• Council tax arrears
• Parking or driving fines
However, you might be asked for this information when applying for a loan or contract and they may choose to use this information alongside your credit report to assess you.
What is a good credit score?
Different lenders have their own standards for rating credit scores.
However, if you have a good score with one of the main credit reporting agencies, it’s more than likely you’ll have a good credit score with your lender.
A good credit score with:
• Call Credit is scoring 4 out of 5
• Equifax is scoring over 420 out of 700
• Experian is scoring over 880 out of 999
Also be aware that each new application for new credit will affect your credit score, although most people regain lost points within about six months.
How can I improve my credit score?
1. Pay your bills on time
It sounds obvious but doing the basics like paying your phone or internet contract on time is a great way to prove to lenders that you’re capable of managing your finances effectively.
Something as simple as setting up payment reminders to ensure you pay everything on the right day can make a big difference.
2. Eliminate credit card balances
If you have a number of credit cards with small balances, it’s wise to try and pay off some of the nuisance outstanding balances.
While it may seem better to have smaller outstanding balances on a number of cards, this is also something which can affect your credit score. Paying off the balances on some of your credit cards and then choosing just one or two go-to cards that you can use for everything is more sensible.
3. Register on the electoral roll
One of the lesser known fixes for a poor credit score is to make sure your name is on the electoral roll.
4. Consider getting a credit-building card
This is a relatively easy way to build up your score if you have a poor credit history, provided you can make the payments on time. The credit limit on these cards is generally pretty low but is a quick way to show you are reliable at paying back credit.
However, be aware that the interest rates charged are much higher than standard credit cards, typically more than 30% a year. So ensure you have the means to pay off the balance in full immediately each month, otherwise you might end up in debt that you struggle to get out of which could harm your credit rating even further.
5. Use your calendar
If you’re shopping for a home, car or student loan, it pays to do your searching within a short time period.
Every time you apply for credit, it can cause a small dip in your credit score that lasts a year which is something to always be aware of.
6. Check your credit report for mistakes or fraudulent activity
Ensure you check all the personal details on your credit file and report any incorrect information, as even having a slightly wrong address can have an impact on your score.
As with all aspects of your finances, it’s important to keep an eye out for any fraudulent activity on your credit report too. If someone has applied for credit in your name without your knowledge, contact the credit reference agency immediately to have your file updated.
Also make sure you don’t have any CCJs on file. Receiving any court judgements for debt will have a serious impact on your credit score.
7. Check if you are linked to another person
Sometimes a person’s credit score can be affected by a partner or family member without them even realising.
Having a joint account with a spouse, friend or family member could affect your personal rating if they have a poor score.
8. Avoid expensive credit repair companies
You might see adverts from firms that claim to repair your credit rating. However, any quick fix they claim to have is likely to be something they cannot actually legally offer.
Many of these companies simply advise you on how to obtain your credit file and improve your credit rating, something which you can already do yourself as outlined earlier in this article.
If you need proper financial advice, use Money Advisor or a similar service.
9. Get rid of any high levels of existing debt
Before applying for new credit, you should ideally look to eliminate any high levels of existing debt you have.
Banks, building societies and credit card companies tend to be hesitant about lending you more if you already have a lot of debt on file.
10. Don’t move house a lot
Sometimes this one is easier said than done, especially if you’re renting, but if you can avoid it try not to move around too much.
Lenders feel more comfortable if they can see evidence that a customer has stayed in one place for a considerable period.