Suppose you don’t like using credit and as a result, have no credit history or have a bad credit score and want to improve it, this is for you. I’ll share what a credit score is, how it works, how you can improve your score and maintain it.
What is a credit score?
A credit score is the rating you get based on your financial habits and history. Credit reference agencies (CRA) provides an individual with a score based on how they manage their finances, including credit usage, bank overdrafts, bills payments and electoral registration.
Your score determines if your application is accepted or rejected by lenders and the interest rate you get.
How Lenders Use your credit score?
Lenders use different criteria to decide if you’re eligible for credit. One is setting a minimum score you need to meet the requirements or be suitable for a credit application. This score is dependent on the provider’s standards and is not universal.
When you make an application:
- they check your score against the minimum score
- If your score is lower, the lender may decide to either charge you more interest or refuse your application
- The lender will let you know if your score or something on your report affected their decision if your application is not successful
However, they are not obligated to provide more information.
How can you check your credit score?
The three leading credit reference agencies in the UK and credit checking providers you can use to check them are:
- Equifax — Check with Clear score or Credit Karma.
- Experian — create a free 30-day account (free account but limited report info) — to see your report after 30 days, you have to pay.
- TransUnion — Check with Credit monitor, Credit Karma or Totally Money.
These three agencies measure your score in different ways. Your score might be different depending on which provider you use, and you can also get a copy of your credit report file for free from them. I’ll recommend checking your score for all three reference agencies as there is no universal credit score.
Things to check once you have registered/signed in to the providers listed above:
- Personal details: are they correct, do they have your current and previous addresses?
- Financial links: are you linked incorrectly with anyone financially, or do they have up to date information on your monetary links?
- Missed Payments: Do you have any missed payments that you want to dispute or that you have forgotten?
- Payment history: Do they have the correct information for all your credit payments? Does it match your actual charges?
Benefits of checking your score
The benefit of using any of the examples above is that they provide an easy to understand report on your score, and how you can improve it if needed. It is essential to know what your score is, as it will allow you to:
- Know how creditworthy you are
- Know what credit lenders see when you make an application.
- See and correct any missing or incorrect information credit reference agencies(CRA) hold about you.
- Know if you’re eligible for credit before applying. It will prevent having too many negative hard searches that may affect your score.
Also, just because a lender rejects your application, doesn’t mean another would not accept it. They use your credit score and information as part of their overall decision.
What do credit agencies use to calculate your score?
The following factors determine your credit score:
- Type of credit: the credit type you use, including overdrafts, loans, credit card, utility and mobile phone bills and mortgages.
- Payment history: any missed, late and on-time payments or how recent your late payment was.
- Credit usage: the amount of credit you have in total and how close you are to that limit.
- Home address: your current address and how long you’ve lived at that address, including any previous addresses.
- Electoral Roll: are you registered to vote at your current address and how long at that address.
- Desire to get credit: your credit account openings and when you opened them. Making multiple applications will leave multiple hard searches visible to lenders and mean you are desperate for credit. It’s usually a red flag to lenders.
- Credit experience: the amount of credit history you had influenced by how many credit accounts you have and when you opened them and closing an unused credit account.
Factors that affect your credit score and how to improve them
Having a good credit score is essential. It can help you get cheaper interest rates on credit offerings and loans and reduce the overall cost of borrowing, such as for a mortgage or other purchases. Below are factors that affect your score.
- Too many applications: Making too many credit applications means you get hard searches in your report. Lenders see this as desperation and are likely to make them reject your application. To improve this, try to make fewer applications in short space of time like six months and ensure you make payments on time.
- Late payments: Missing your payments tells lenders you’re unreliable and are likely to have similar issues when applying for new credit. To improve this, ensure you pay your bills on time and set direct debits if possible, so you don’t miss any payments.
- Changing address: This is a tricky one to deal with as lenders may get the wrong impression of financial instability. They may also fear they won’t know where you live if you fail to pay back loans or bills. To improve this, make sure you update your current address as soon as you move along with registering to vote at that address.
- Electoral roll: If you’re not registered to vote, lenders can’t confirm if you live in that address as it’s one of the ways they use to verify your address. To improve this, as mentioned above, ensure you are registered to vote at your current address.
- Mistakes and errors on your report: Simple mistakes such as the wrong current address, mistake in your name can harm your credit score. To improve this, make sure you review the information carefully on their sites and raise any dispute with the agency if you find any mistakes.
- No credit history: This means you have no evidence to show lenders that you’re reliable. To improve this, you can get a credit building card and use it responsibly.
- Too many credit accounts: This tells lenders you are a risk because they think you may be borrowing more than you can handle or payback. To improve this, cancel and close any unused credit cards and accounts. It can help improve your credit over time and shows you’re in control of your credit.
In summary, I’ve given a brief introduction to what a credit score is, how you can check your score using the credit checking providers and factors that affect your score. In the next money matters post, I’ll explain the information you get in your credit report. I’ll also go into how you can use that information to improve your credit score and maintain it.