How to Improve Your Credit Score (in 9 Easy Steps)
UK credit score ratings are shrouded in myth, rife with misinformation and misunderstanding. Lenders and credit reference agencies are in no hurry to divulge their secrets, making it harder for credit applicants to know what’s actually available to them.
Possessing a healthy credit score unlocks more financial doors when you need to obtain credit. Whether you wish to apply for a payday loan or mortgage, begin a new business or purchase a new car; financial lenders are not only more willing to provide you with credit but will offer better borrowing terms.
While a good credit score offers better credit options to you, inevitably a poor one severely limits options available to borrowers. Lenders are under increased pressure to only offer credit to those who are able to make their repayments on time, and never to offer credit terms where potential customers could default.
Obtaining a healthy credit score can impact you in more ways that borrowing money in the form of loans, overdrafts and credit cards. A bad credit rating can influence your ability to obtain a mobile phone contract, bank current accounts and even car and home insurance!
It’s now time to manage and improve your credit score!
What Is a Credit Score?
A credit score is a means utilised by lenders and financial institutions to ascertain whether you are a suitable candidate for a line of credit, namely loans, bank accounts, mortgages, credit cards or mobile phone contracts.
A credit ‘score’ is determined by informational; usually, both personal and financial details held on your ‘credit report.’ Credit reference agencies like Experian, CallCredit and Equifax, compile data on potential borrowers and use a mathematical model to calculate the score that represents your credit history – thus indicating what type of potential borrower you’ll be, especially will you repay, will you not, and will lenders make a profit out of you.
Higher versus lower scores, lower risk versus higher
Whether you like it or not, your credit score will play a pivotal role in your ability to apply for any form of credit from financial institutions. For example, when applying for a short term loan or credit card, it will determine whether your application is accepted, and what terms you will be offered (like how high your interest will be and how much you’ll need to repay).
Typically, those with lower credit scores are seen as more of a risk to lend credit to; so, credit applications are usually rejected, or the repayment terms are more severe. Those with a higher score are more likely to be seen as a lower risk, with lenders able to make a profit from.
It’s worth noting that each lender pursues different criteria for credit scoring. So, although you may get rejected and deemed a higher risk from one lender, another may view your application differently.
How Does a Credit Score Work?
Whilst a poor history counts against you, so does having no credit history as there is no data to assess you by.
Credit scores are influenced by numerous factors including (but not limited to) mortgage payments, credit cards and loans held, address history, country court judgements (CCJs), individual voluntary arrangements (IVAs) and bankruptcies. In fact, anything related to you.
Surprisingly, it is not only a bad credit history that can impact you, but having no credit history is also detrimental should you wish to obtain credit in the future because credit reference agencies know little about you whether to judge if you’re a good creditor or not.
For example, if you scored low on Peachy’s credit rating system or even if you have a healthy credit score, you may be rejected because of past financial history OR, the lack of one.
Responsible lenders like Peachy determine your credit ‘score’ by assessing information including:
Information on your application form
- Whether you’re a homeowner
- Employment details
- Family size
- Reason for the loan and the amount
- Search your past history with existing lender
Credit files of Credit reference agencies
- Electoral roll (are you listed at an address)
- Court records (CCJs, IVAs, bankruptcies, other court debt orders)
- Search and address data (too many searches in a short period of time can impact your decision)
- Bank and building society data (sharing mortgage, loan, savings, current account data)
- Also note, payday loan is now included
- Your related persons’ data (if your spouse has bad credit history, this will impact yours)
Mobile phone and energy utility data
- Mobile phone contract data
- Gas and electricity companies
- If you’ve committed fraud
- Or somebody has stolen your identity and been fraudulent in your name
So, if you are over 18 years old and have any of the above, such as credit cards, mortgages and loans, then you’ll likely have a credit report with a ‘credit score.’ Please remember though, each credit agency scores in a different way, with different ratings.
9 ways to improve your credit score
Since the credit crunch began in 2007, the significance of credit scoring in our financial lives has grown considerably. By following Peachy’s 8 tips below, you can ensure you are doing your utmost to improve your credit report.
1. Check your credit file and information
Before you apply for any loan or credit, it’s a great idea to check your credit report first. You can access your credit report on a free-trial basis or by paying a small fee at Experian or CheckMyFile. Noddle for CallCredit is another credit scoring agency where you can sign up for free, and they’ll send you monthly updates on your credit reports.
Ensure you read all the report carefully, and if any information listed is suspect or inaccurate – contact the lender concerned and action all irregularities immediately.
2. Register to vote with your local council
As mentioned, credit agencies check the addresses you have previously and currently reside at to verify you as part of your application. One of the ways to signify that you exist at an address is to state that you wish to be known at one. Thus, registering to vote is an excellent and straightforward way to do this.
To register yourself it’s simple, visit www.yourvotematters.co.uk and select “Register to Vote” and your region you live in. Alternatively, you can contact your local council office, and they will be able to provide the relevant registration forms.
Once you have registered, you’ll receive a letter from your local council stating you are entitled to vote in that electoral ward. Once you receive this – you’ll know that you begin to appear on credit reports at this address.
3. Clear any associated debt away from your file
When applying for any form of credit, in addition to your own information, lenders will check and assess those you are connected with, for example, spouses and the addresses you have resided at, past and present.
It’s crucial that you obtain a copy of your credit file to view if any previous tenants have passed on debt to your address or if your spouse has a prior obligation that impacts your score, thus needs removing from your record. Hence if you split up with someone or left a tenancy where you’ve shared finances with, make sure their bad debts don’t affect your future credit history.
To have the debt removed from your report, you’ll need to write to the credit agency concerned and ask for a “notice of dissociation.” The process is different for each credit agency, but they should all be similar to this method from CallCredit.
Note: If you still have an open account with a past partner, you cannot remove this association. You’ll need to shut down the said bank account or get yourself removed from that account in the first place.
4. Cancel any cards you no longer use
It’s common for consumers to switch credit card providers and bank accounts and forget to cancel their existing agreements, even if they no longer use them. With the rise of balance transfer credit cards, this occurs more frequently than you think. Additionally, if you have repaid old credit card balances in full, that line of credit will still appear on your credit file as part of your ‘debt.’
For potential credit applications, lenders assume that to lend you anymore could be irresponsible, as you can max out your existing and potential newer credit options. Simply put, too much available credit can be damaging to lend you even more.
The tip here is if you do not use old credit cards and bank accounts – then close them down or cancel the agreements. Otherwise, should you need other credit options like a loan or mortgage, you’ll find yourself declined.
5. Pay your debts on time and build a good credit history
The key to getting an excellent credit rating is to manage your debt sensibly. If you have credit cards or loans, repaying each month on time demonstrates that you are able to handle credit and thus, build a positive credit history. Plus of course – paying your repayments on time reduces the amount of interest you’re likely to accrue and reduces your long-term financial burden.
If you have a weak credit history or those with no financial history at all, then you could apply for a Credit Building credit card. These credit cards offer a small line of credit and very high interest rates, so the tip here is to use them but repay in full each month on a small, manageable amount. Doing this is a fantastic way to rebuild (or build) trust with lenders so that you can apply for other credit cards with more favourable terms in the future.
6. Ensure your application has accurate and truthful information
When applying for credit, even if you have been refused previously, never lie and always be honest and precise. If you submit several applications in a certain length of time and they appear inconsistent, they could be considered fraudulent and negatively impact your credit score as you’ll seem unreliable.
If you recently moved emigrated to the UK and have no credit history, or became a victim of credit card or identity fraud; then add in this information to your application as it can support, rather than harm your chances.
7. Don’t apply for several credit applications at once
Each time you apply for credit, a credit search note is made by the lender and the more credit searches that are made in a short length of time; the less likely you are to be approved. Try to space out your applications and do not apply for several types of credit at once as each credit search makes you look desperate.
Ideally, by obtaining your credit file, you’ll have a better idea if you’ll be accepted or not. Plus, several credit card providers offer checks on your personal details without a search appearing on your credit file. These checks will advise whether they will be likely to accept you or not. If they do inform you’ll be accepted, only then will a full credit search be applied.
8. Create a sense of confidence by showing stability
Lenders and credit reference agencies dislike change – this unnerves them as they fear that you leave a debt or they cannot get hold of you regarding repayments.
If possible, reduce the possibility of changing your job or address. Lenders are more likely to offer credit to you if you are stable; by staying in one location for a lengthy period and remaining in your current job role as this creates a sense of confidence.
Another tip is to even include your landline phone number instead of a mobile contact number, as a landline fixes you to an address.
9: Request a Certificate of Satisfaction from a CCJ
If you have a county court judgment (CCJ) against you, then it will be listed on your credit file. CCJs are recorded on your credit file for up to six years (unless you pay the debt within one month).
Once the debt has been settled, you can ask for a ‘Certificate of Satisfaction’ that you can present to a credit reference agency. The ‘Certificate of Satisfaction’ will show on your credit file that the debt has been “Satisfied”.
However, even if the CCJ has been settled, please note that several lenders will not accept applicants who have had a CCJ within the last 12 months.
While it can be slightly embarrassing to be declined a line of credit by a lender, it does help to know how the credit rating system operates and what you can do to improve your chances of acceptance.
Check your credit file regularly (every six months) and ensure it accurately reflects your correct information and that no one else is running up a line of debt in your name. And if you get a letter from a collection agency, always respond immediately.
Healthy Credit Rating Checklist
To help you boost your credit rating, we’ve strung together a checklist that you can use as a goal to reach a healthy credit score.
If you answer “Yes” to all eight questions, then chances are you have a healthy credit rating.
- Have you recently checked your credit file, and is your information accurate?
- Have you registered to vote with your local council/ online?
- Have you cleared all associated debt from your credit file?
- Have you cancelled all credit cards you no longer use?
- Do you pay your debts on time?
- Is the information on your loan application accurate?
- Has it been more than six months since your last loan application?
- Have you had the same job and location for more than three years?
Disclaimer: This checklist does not guarantee your loan application will be accepted and is not a legal document to prove you have a positive credit rating. The list should only be used as guidance.