A good credit score is vital when you apply for any financial product. This may be a credit card, loans, a mortgage or interest free credit, even a mobile phone contract. There are a number of factors that determine your credit score. So how do you improve your credit score?
What is a Credit Score?
Banks and other lenders check your credit score to help them decide whether to agree to your application to borrow money. It’s a system whereby they can make a judgement about how suitable the product is for your budget, and how reliably you will make payments. Experian, Equifax and TransUnion are three main credit reference agencies in the UK. They hold data about your financial history. Typically any debts you already have, which is known as your credit report. This includes any bank accounts and credit cards you hold and mobile phone contracts. This report is used to generate your credit score, which places a value on your creditworthiness.
Why Does a Credit Score Matter?
Each reference agency has its own numbering system but very simply, the higher the score the better, meaning you are more likely to be accepted for any applications you make for credit. Further to affecting your eligibility for certain financial products, your credit score will also influence how much money you can borrow and what rate of interest you will be charged for it. Which is why it is a good idea to implement as many ways as possible to improve your credit score.
Where Can You Find Your Credit Score?
There are a number of ways to access your credit score. If you already hold a credit card, some providers offer a free credit score service. Check within your app or log into your account online to find out. If this is not available to you you can access either free or paid for credit report services from Experian, Equifax or TransUnion. There are several options for seeing your score for free. MoneySavingExpert’s Credit Club will let you access your Experian score. ClearScore will give you a score based on information from Equifax. Credit Karma is a free subscription service which lets you see your TransUnion score. Checking your credit score will not influence it and most services will give you a little insight to why you have scored that value and advise you about ways to improve, which can be useful and empowering.
How to Improve Your Credit Score
Credit management is an all too often overlooked subject. If you are a parent who is keen to educate your own children about good financial management, we have a blog post explaining how to teach your kids about credit here. However if you would like to know how to improve your credit score, we have all our tips and hints here. It may seem counterintuitive to apply for credit if you are not intending to use it. However you are not automatically assigned a favourable credit score, until you have a proven track record and to achieve that you need to demonstrate you can manage a real life credit contract. This is very often a mobile phone contract.
Incorrect information can lower your credit score. Check your credit report and if you spot a mistake, or any out of date information, contact the lender or company directly to make the correction. This will then show up on your next credit report.
Borrow – responsibly
As we mentioned, to earn a good credit score, you need to build a proven track record of managing credit responsibly. Opening a credit card is a good start. But you must be careful how you use it. Using credit responsibly demonstrates that you are more likely to repay your other debts, which will boost your score. It’s generally considered good practice to never use more than 50% of your available credit. If you regularly use all of the credit available to you, it suggests that you are relying on borrowing for everyday spending, which scores poorly and will cost you more, even if you pay it back each month.
High maximum credit limit
A high maximum credit limit on your credit file signifies that other lenders believe that you are a responsible borrower. So even if you pay off your whole balance every month, consider asking the credit card provider if they would consider raising your credit limit, not necessarily to be used, but a high maximum credit limit scores highly on your credit file.
Always repay on time
Missed or late payments are a huge red flag to lenders. Make sure you always make your repayments on time, regardless of how much you borrow. The easiest way to make sure you do, is to set up an automated direct debit. Most lenders will offer you the opportunity to repay the minimum payment each month, or a fixed monthly amount, higher than the minimum payment. There are heavy penalties for failure to repay which can become costly and risk being issued a county court judgement (CCJ) which will hamper your eligibility for other financial products in the future.
Register to vote
Signing up for the electoral roll helps banks and other lenders to confirm your identity. If you have recently moved home it is sensible to get on the register as soon as possible, even if there’s no election coming up. This is because this quickly confirms how lon you have lived at your current address and the longer you stay and one address, the more this will contribute to your credit score. This demonstrates reliability. You can register online using the government’s register to vote service.
Pay your bills on time
The way you use your current account also contributes to your credit score, as well as other contracts such as paying your phone and energy bills on time. Avoid any unwarranted borrowing to maintain a healthy credit score. If you accidentally go over your overdraft limit, if you have one, this will score negatively.
Split the bills
If you live with a partner, it might seem more simple to let one person deal with all the bills. But this means that one partner is building a good credit score whereas the other will not be visible to lenders in this instance and can have implications for future borrowing. Make sure each name appears on some of the bills. If you split up with your partner, you may be surprised to learn that your credit profiles will still be linked, even if you are now divorced, particularly if you had joint borrowing such as a mortgage. If this feels risky you can have this amended. Once you’ve closed any joint accounts, or transferred them into individual ownership, contact the big three, credit rating agencies to ask for a financial dissolution. That way you won’t be affected by your ex-partner’s borrowing habits.
Avoid hard searches
When you apply to borrow money, the credit agency will conduct a hard search which will contribute to your credit score. Despite being part of the process, too many hard searches in a short period of time indicates that you are either seeking lots of credit in a hurry, or you have been declined by other lenders, which scores negatively. Most agencies will allow you to conduct a soft search, which does not appear on your credit file, but should give a better idea of what products you will be eligible for, for example what credit limit you are likely to be offered, and how likely it is your will be accepted. Try not to open more than one new credit account within a 6 month period. This indicates responsible borrowing and will help you maintain a healthy credit score.
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