Your credit score, also known as credit rating, is a score which is calculated by credit reporting agencies and is meant to reflect how likely you are to repay credit on time. The credit reference agencies collect and maintain credit information including your previous lines of credit, your repayment history, the amount of debt you have and the length of your credit history.
Who are the main credit reference agencies in the UK?
There are three UK credit reporting bodies or agencies in the UK that collects and provides credit history and public record information to consumers and businesses. These are Equifax, Experian and TransUnion (previously called Callcredit). So you don't just have one credit score, you actually have three - one from each of the UK's credit reference agencies. These credit reference agencies use different methods for working out credit scores and different scoring methods but whatever the number, the rule of thumb remains the same - the higher the score, the better the chance of being accepted for credit and at the best rates. The credit score will be a three-digit number and it changes over time. You can check your credit score for free with some credit reference agencies.
I use a company called ClearScore, which provides credit ratings and credit reports free of charge. They aren't a credit reporting agency but they show you your Experian credit score and report for free. Your report and score get updated every month and you receive monthly updates about it so you can track any changes. It's also good to check your payment history on the reports to see if there are any missed payments or any incorrect information on your credit report. They also give suggestions on how you can improve your credit score. However, you do also receive emails on suggested personal loan and credit card offers you may be eligible for, which I just ignore!
Why is my credit score important?
Credit scores are used by potential creditors and lenders to help them decide whether to offer you credit. Car dealerships, banks and credit card companies will take into account your credit score (as well as other factors) when deciding whether to offer you loans or credit cards and you're also more likely to be offered better terms and a more competitive interest rate if you have a good credit score. The credit scores lenders accept may vary depending on their different criteria, which may include information such as your income or other factors. Your credit score can also affect the premiums you pay on insurance policies, for example, home insurance and car insurance, as well as getting a mobile phone contract.
Some jobs require that a pre-employment credit check is carried out, such as financial advisers, accountants, solicitors and the armed forces.
How can I boost my credit score?
Here are 7 ways you can improve your credit score.
1. Check your credit reports regularly to check that they are accurate.
Check that your personal details are up-to-date and accurate. Report any mistakes in your report, even if it's just a typo in your address, as this can affect your credit score. Some common mistakes to look out for are fraudulent or duplicated accounts and wrong payment information, for example, a recorded missed payment. If there's a mistake in your report then contact the provider directly and ask them to change it. If you need help then the credit reference agency can raise a dispute with them on your behalf. If there is information on your report which is correct but will negativity impact your score, and occurred during special circumstances (such as a period in hospital or losing your job) you can ask the credit reference agency to add a Notice of Correction to your credit report, explaining this.
2. Make sure you are on the electoral role
Make sure that when you move house, you register to vote at your new address as soon as possible. This can improve your score within 8 weeks as Councils send voter data to credit reference agencies once a month. Don't wait for the annual reminder, apply as soon as possible at Gov.uk.
3. Never miss a payment or make a payment late
Making sure you can pay you bills on time is the best way to prove to lenders that you can manage your finances effectively. Missing or defaulting on a payment can have a disproportionate impact on your credit score. Doing this once or twice can impact your credit score for years, and defaults in the previous 12 months will impact you the most. Paying your bills by direct debit will make sure you don't miss a payment or are late. If you do miss a payment or are worried that you can't make a payment then contact your provider as soon as possible.
4. Make sure your finances aren't linked to someone with a bad credit score
If you have a joint account with someone with a poor credit score, this can affect your credit score. Breaking these financial links could boost your credit score within a month. Joint accounts that are considered here are a joint mortgage, joint loan, joint bank account and, in certain circumstances, joint utility bills. If you break up with someone that you've had joint finances with, you will need to make sure you de-link your finances and contact the credit reference agencies and ask for a notice of disassociation. This will stop their credit score affecting yours in the future. You will need to no longer have a joint account or joint loan with your ex for the credit agencies to do this.,
5. Limit credit applications
Applying for credit frequently in a short space of time can negatively impact your credit score. If you’ve been turned down for credit, you should avoid applying for credit again immediately. It makes lenders think that you are overly reliant on credit and are therefore higher risk. Each application for credit will record a hard search on your report which companies can see, and this is on your file for a year. It's therefore good to space out your credit applications, for example a maximum of one every 3 months.
6. Avoid using your credit card to withdraw cash
Many lenders view this as evidence of poor money management, except for when you withdraw cash on a specialist card abroad. Withdrawing cash on a credit card is expensive as you're charged for this, even if you repay in full each month.
7. Try and stay under 30% of your credit card balance
If you have a credit card limit of £6,000 then try and keep the balance below £1,800. Usually a lower balance on your credit card will be seen positively be lenders.
It's important to know your credit score and check it frequently. It is also a good way for you to be alerted to and report any fraudulent activity such as borrowing in your name.