Whenever you apply for a loan, overdraft, mortgage, credit card or other forms of credit, the lender in question will refer to your credit score.
Your credit score is a tool that lenders use to help determine whether or not you qualify for a particular credit service – be it a loan, mortgage, credit card or otherwise. It’s a three-digit number that’s primarily based on the information in your credit report and represents your “creditworthiness” – a valuation lenders perform to determine how likely you are to repay any credit.
In the UK, you can obtain your credit score from one or all of the three main credit reference agencies (CRA): Equifax, Experian and Callcredit. However, as each CRA will assign its own credit score based on the information in your credit report, it’s important to keep on top of your financial obligations to ensure everything is in good shape.
In this blog, we will highlight five things that could potentially damage your credit score to help you to borrow responsibly and stay on top of your credit obligations.
What can damage your credit score?
Applying for several credit cards or loans within a short period of time
Applying for too many credit cards, loans or other credit services in a short period of time will add multiple credit inquiries to your credit report. Credit inquiries are essentially requests from the lender – known as “hard inquiries” or “hard searches” – to check your credit report so the company can make an informed lending decision.
Multiple hard inquiries on your credit report can affect your credit score as lenders can see you applied for credit, as well as whether or not you were accepted. Credit agencies may view multiple hard inquiries as a sign of financial stress or that you have a dependence on borrowing and, as a result, consider you a high-risk customer.
The solution? Avoid applying for more than one form of credit at a time and wait at least two to three months before making another application. Taking a few months between applications will ensure you don’t damage your credit score.
Ignoring errors and/or inaccuracies on your credit report
The smallest of errors and/or inaccuracies on your credit report can have a negative effect on your credit score. Typically, credit reference agencies are very good at managing your credit score – but even then, mistakes can happen. We would suggest that you check regularly – where possible – and dispute any errors and/or inaccuracies.
To dispute errors, write a dispute letter to the relevant CRA and creditor clearly explaining what information you think is inaccurate. Include copies of documents to support your dispute, as well as your full name and address. Each error should be listed as a line item with corresponding evidence.
Explain the facts and request that the information be removed or corrected – make sure you provide specific instructions. Keep copies of any dispute letters you send or correspondence with the CRA for future reference. Finally, make sure to follow up a few days later – via phone, email or letter – to ensure your dispute has been received and actioned.
If you are interested in what lenders look at in your credit report to determine your credit score (and whether or not they lend to you), read our blog on reliable ways to check your credit score.
Checking your credit report won’t damage your credit score; we would advise you to check it on a regular basis as doing so will help you to better understand your financial position!
Requesting a credit limit increase
Typically, requesting a credit limit increase will trigger a hard inquiry or hard search on your credit report which can hurt your credit. The lender essentially wants to understand if it’s viable to actually lend to you. If you have a short or problematic credit history, not only will you be declined the limit increase, you will also have that hard enquiry/search on file for other lenders to see.
Your partner’s finances
Applying for credit with your partner, such as a joint mortgage, for example, means that you will be linked to their credit history. So, if your partner has a poor credit score, your credit score will be affected too. For instance, if your partner has been made bankrupt or declared bankruptcy – this may affect your chances of being approved for credit.
On that basis, try to avoid sharing finances with your partner. If you and your partner split and have joint credit accounts, make sure to contact the three main CRAs and request a “notice of financial disassociation” to split up your finances. Make sure you are prepared to show proof.
A high credit utilisation rate
A low or “good” credit utilisation rate (generally around 30%) indicates to lenders how well you can manage your finances. A high credit utilisation rate is a sign that you may be experiencing financial difficulty and is a strong indicator of lending risk. Missing payments, falling into arrears, and frequently going over your credit/overdraft limit will affect your credit rating.
What can you do to improve your credit score?
All the above considered, it might seem difficult to improve your credit score – but we’re here to tell you that there are steps you can take to slowly, but surely, improve your credit score and become a responsible borrower.
So, if you want to take control of your credit score, why not download our eBook – ‘A simple guide to help you improve your credit score’?
In the eBook, we share some practical advice and tips on what you can do right now to start improving your credit score. Click here and download it now!