When you’re applying for a loan, the whole system of credit checks, credit scores, and credit records can sometimes seem a little daunting and mysterious. So we’re here to tell you that it isn’t! We want to remove the mystery, dismiss the fear, and give you some solid advice as to how you can understand your credit score, and improve your financial well-being.
When it comes to credit and lending, behind the scenes there’s an entire system that gives each person a rating, or ‘credit score’, to determine how much credit they might be able to safely borrow and pay back. These scores are decided by Credit Reference Agencies, based on what they can see of your financial activity. As with any score, there are things that will count in your favour, and there are things that can count against.
What we want to do is to make it clear how this system works, and then offer you some practical steps to help you improve your financial well-being and build up your credit score.
Why does a good credit score matter?
Having a good credit score means more than just being able to take out a payday loan or get a new credit card. It can affect much more than you think. Your credit score influences almost all of the other financial commitments in your life—such as mobile phone contracts, car insurance, applying for new bank accounts, and, of course, the big one…. applying for a mortgage.
For most busy people, keeping track of their credit score is way down their list of priorities. In the end, a good credit score means that businesses will consider you less of a risk, and this means they might offer you cheaper rates, larger loans, or lower interest on your credit. It makes sense to find out what your credit score is, and then take some simple steps to maintain it or make it better.
It’s a lot easier than you think, and a small amount of effort could lead to some major changes!
What is a credit score, and how is it different to a credit report?
Your Credit Report is the record of your borrowing history (it’s sometimes called your ‘credit history’). It gives a detailed breakdown of all your financial behaviour. Think of it like your financial CV, that lenders, banks and businesses will read before they decide to give you a contract or lend to you.
Your Credit Score is a more short-term snapshot of your current score/rating, as calculated by the Credit Reference Agencies. This summarises your likelihood of being accepted for credit at any given moment in time. It’s more like a single test, than an overall CV, so it’s that much easier to improve your credit score in the short term with a bit of effort.
Your Credit Report/History will contain all the records of your borrowing, your history of repaying any debt and paying your bills and will list any CCJs or bad debts. There are three main Credit Reference Agencies in the UK, and they will each calculate your Credit Score differently, with a different interpretation of your history, so make sure you do not confuse reports from the different agencies.
How to keep track of your credit report
The three main Credit Reference Agencies in the UK are Equifax, Experian and Callcredit. They each use a different scoring system to calculate your credit score, and different businesses or lenders might use different agencies for their information. Each of these agencies will supply you with a very detailed report of your credit score, but they will charge you a fee for doing so (although most will offer the first 30 days for free, after which you can cancel).
If you are content to settle for a free but less detailed report, then you can look on Clear Score, Money Saving Expert’s Credit Club, or Noddle. These all offer a free service—which they get from the three main agencies above—just with a bit less detail. If you are really serious about improving your credit score it’s a good idea to look at all three, as they will all score you differently, and will show different results
Tips on how to improve your credit score
Here are some recommendations for the steps you can take that could make a difference to your credit score. You can only really start to plan for your financial future once you get to grips with your credit history – so you might as well start today!
1: Get your credit reports – and check them!
The very first thing you should do is to thoroughly check your credit report. Double-check that all your details are up to date and look out for any fraudulent activity. Identity theft and online fraud are growing problems, so the first thing you should do is check that no-one has applied for or taken out a loan in your name.
If you do find something suspicious you should contact the Credit Reference Agency – the report will contain a phone number or email address so you can get in touch. This way any discrepancy can be investigated and checked-out. Your credit rating could be damaged by this kind of activity, so it’s really worth taking this step.
2: Check whether you are linked to another person
Having a joint account with someone who has a poor credit score can influence your credit history. You may want to disassociate yourself from your financial partner if they have a poor credit score, and then notify the credit reference agencies that this has been done. Likewise, if you have any dormant shared accounts from any past relationships, you could still be affected in this way. You can only find out by checking your credit score.
3: Limit your number of credit applications
Most applications for credit are recorded, leaving a ‘footprint’ on your credit report. You should try to avoid applying for credit several times in a short period of time. Too many applications may trigger rejection, as it could appear to lenders that you are desperate. Instead, where possible, try to space out any credit applications over a period of time – restricting yourself to once in a month at most. Because of this ‘footprint factor’, whenever you make any credit application, it’s better to approach a direct lender rather than a broker, as a broker may pass your details to a number of lenders they work with, and this could be bad for your credit score. It’s much better to stay in charge of this process yourself.
4: Pay your bills on time
This one may seem simple, but your credit score is a snapshot of your credit worthiness at that particular moment in time. If you repeatedly fail to pay your phone bill, or miss payments for your internet connection, this may negatively affect your credit score (although not all companies report in real time, so if you bring your payments up to date before the data is sent out, you can avoid any negative impact). Likewise, if you have been paying all your bills on time for a several months, this will signal to lenders that you are capable of managing your finances and improve your reliability via your credit score – making you a less risky prospect for lenders.
5: Don’t miss repayments
Just as with paying your bills on time, you should try not to miss any credit repayments, as this could adversely affect your credit score for a long period of time. The last thing lenders want to see is a customer failing to make their repayments, so factor this in mind when you are budgeting your finances.
6: High levels of debt and court judgements
Outstanding debt and County Court Judgements (CCJs) will also have a serious impact on your credit score. While some lenders will be prepared to take them into account, if you have this on your credit report, you will definitely need to follow the other steps on this list to give your credit score the best chance of improving.
7: Build your credit score with a credit building credit card
Some credit cards have been designed with the specific purpose of helping you to build your credit score. If you’ve never had credit before, or you have a limited credit history, it may be difficult for lenders and businesses to assess and grant you credit. You can check online to find yourself a ‘credit-building’ credit card to help you improve your credit history. Of course – the most important aspect of this card is your regular and reliable repayment, which will help the Credit Reference Agencies to see you managing money responsibly.
If you don’t want to take out a credit card, an alternative to this is to apply for an affordable monthly mobile phone contract instead. Regular and reliable payments on a phone contract should also be beneficial to your credit score over time.
8: Register to vote and don’t relocate too often
Lenders and businesses prefer applicants who are established at a particular address, ideally for a long period of time. The best way for you to establish your address is to register to vote, as you will then appear (with your address) on the local electoral roll. If you are not eligible to vote in the UK, you may want to consider sending proof of your address to the Credit Reference Agencies to enable verification.
Credit Score Summary
Monitoring your credit score might not have seemed important until you read this list, but now you’ve likely realised how it should become more of a financial priority – especially if your credit score hasn’t been in the best of shape. The good news is that there are a number of simple things you can do to improve your situation, boost your financial health and repair your credit history. This is a long-term commitment, and will take time, but of course – the sooner you start the better, so why not begin today?
If you are currently faced with a cash flow problem, have a bad credit history, and need short term financial relief for an unexpected bill or expense, why not consider applying to take a short-term loan with Uncle Buck in the meantime? Representative 1249.0% APR
Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk