Your credit score is one of the most important numbers you should be aware of. Unless you have won Euromillions, or happen to be the Duke of Westminster, at some point in your future you will probably need to access credit.
It could be a £500 overdraft, several thousand pounds for a car, or hundreds of thousands of pounds for a mortgage.
In all of these cases your credit score is going to determine whether you will get a ‘yes’ in the first place, and then how favourable the terms of your credit agreement will be – or in other words how expensive the cost of the credit will be for you.
A poor score can make it harder to:
- access the best financial products
- rent or buy a property
- get a mobile phone contract
- qualify for some jobs
The difference between a ‘low’ score and an ‘excellent’ score could mean nearly £20,000 in extra interest repayments across a lifetime – that’s the equivalent of a year’s annual take-home salary for millions of people.
What is a good score?
There are many different credit report services in the UK and they all have their own range of scoring. For example the top score with Experian is 999, while other agencies score out of 700. But whatever service you use they will indicate whether it is excellent, poor – or somewhere in between.
Your credit score is built up – or knocked down – over the course of your financial life. Many factors go into determining your score and it’s not just about the size of your income or how much money you have – although that is important. Also important are things such as:
- a track record of debt repayment
- stability in your general life, for example longevity in employment, few changes of addresses
Where do I find my score?
Many people have no idea of their credit score – some possibly prefer not to know! It’s estimated around 32 million UK adults have never checked their score! To most, they aren’t really a concern UNTIL all of a sudden they need to borrow some money.
It’s very simple to get your credit score. As mentioned there are many different agencies that will provide this to you – a quick internet search will find them. They all have different terms – most are free for an initial score check and then may require a small fee thereafter.
To get your score you will need to fill out a questionnaire on aspects of your financial and personal life. In most cases the process is fairly quick and you should be able to get your credit score within about 20 minutes. If you haven’t ever done so, or have not checked your score for many years, it makes sense to run a check in the near future.
How do I improve my score?
Obviously getting off to a good start is important so try to run a good financial ship from an early age, and your record should take care of itself. If, like many people, you have a period of financial hardship or difficulty, it is likely you will have done things that may have tarnished your score.
Unfortunately, once your score goes south, it takes longer to improve. Messing up just once could result in a serious loss of points that will take a long time to correct and you’ll have to demonstrate years of positive payment history to get your score back to good shape.
In very general terms, things such as defaulting on loans or missing repayments have a very negative effect on your score. A good, consistent track record of paying things off has a positive effect. But no matter what your score is there are some basic things you can do to get it heading north.
Step 1: Check and correct mistakes
Check your credit score at least once a year to make sure that the information it contains is correct.
If there are any mistakes, these could stop you getting credit when you need it – so it’s important to report them to the credit reference agencies as soon as possible.
Step 2: Get yourself on the electoral roll
If you’re not on the electoral roll, you could find it very difficult to get credit.
Your local authority is likely to contact you once a year, prompting you to ensure that anyone eligible to vote in your household is on the electoral roll. You can also register online at any time through the Register to vote website.
Step 3: Think before applying for new credit
Making an application for credit will leave a ‘footprint’ on your credit file, which will be visible to other lenders. If you’ve recently been turned down for credit, it’s unwise to apply for another credit card or loan immediately; multiple applications over a short period of time may suggest to lenders that you are in financial difficulty. This could ultimately make them reluctant to let you borrow.
You can also ask lenders to perform a ‘quotation search’ rather than a credit search when you are looking to get new credit. If the lender agrees, this should prevent a footprint being left on your file and give you an idea of whether your application would be accepted, as well as what interest rate you’d be charged.
Quotation searches are most frequently used for mortgage applications, particularly if you’re shopping around for the best deal.
Applying for credit immediately after moving house or changing your job might affect your success rate. Lenders like to see evidence of stability, and you will be asked how long you have been in your current job and address.
Step 4: Close old credit card accounts
Lenders will look not only at how much debt you are in, but at how much credit you have available, before agreeing to lend to you.
If you already have several credit cards with high limits, lenders may be reluctant to let you borrow more. This is because, if you went on a sudden spending spree, the amount of debt you are in could suddenly jump overnight – potentially leaving you at risk of failing to repay what you owe.
Step 5: End financial associations with ex-partners
Co-habiting with or being married to someone with a bad credit rating won’t affect yours – but taking out a joint financial product with them will.
Opening a joint current account, for example, will create a ‘financial association’ between you and the other account holder. Lenders may look at their credit report as well as yours when assessing your application, as their circumstances could affect your ability to make repayments.
If you have ever jointly held a financial product with someone you no longer have a relationship with, ensure that this is reflected by asking all three credit reference agencies to add a ‘notice of disassociation’ to your file.
Step 6: Build a good credit history
To improve your chances of getting credit in the future it’s important to begin building a good credit history now. Showing that you can repay on time and stay within the credit limit you’ve been given will help convince lenders you are responsible.
If you’ve never borrowed money before and so have no credit history, you may have limited access to loans and credit cards – especially those with the cheapest rates.
You might find your only option is to borrow from your own bank, or take out a credit card with a very high interest rate. These are often marketed as ‘credit builder’ credit cards.