S2E6: How to improve your credit score
There's a lot of misunderstanding about credit scores so in this episode, which is a beginner's guide, we explain the fundamentals, how to improve your score and debunk some common myths.
What you should remember
The credit score that you can see via a credit reference agency is a numerical representation of what a credit reference agency thinks of you. It’s an approximation and is their view of you.
When you want to borrow money, a lender will get your latest credit file (sometimes called a credit report) from the credit reference agency (or agencies) they use. Your credit file will contain many rows of data which lenders will use to evaluate if and how to lend to you. The lender will rate you based on lots of different inputs, including your credit file.
Your credit score that can see from a credit reference agency is more a gauge for you to use - it’s indicative of how credit worthy you are rather than the be-all-and-end-all. It’s also a way for agencies to engage directly with consumers.
The three main agencies are Equifax, Experian and TransUnion.
There are several companies that can give you access to the data from reference agencies, e.g. ClearScore shows your Equifax credit score.
Lenders ask you plenty of questions so make sure you answer everything correctly in your application forms. And make sure your data is up to date with credit reference agencies (which lenders will cross check your application against).
Being on the electoral roll helps as it shows you are more settled.
Your credit history lasts for 6 years, so if something happens, like you miss a payment or default on a loan - that’ll be on your credit file for 6 years.
There is a hierarchy of impact (some things hurt your credit file more than others) but you want to avoid any marks, like missed payments but of course defaults, CCJs etc.
Check our ‘getting out of debt’ episode if you’re struggling and please do speak to the Samaritans.
Because your credit history lasts 6 years, it can be reset in 6 years, i.e. you can wipe the slate clean in 6 years if you’re good with credit. This is why a lot of mortgage lenders ask if you’ve ever been bankrupt (in case you went bankrupt more than 6 years ago which wouldn’t be on your credit file).
Some things credit reference agencies don’t know about you:
Race, religion etc.
Who you’re married to/living with - unless you have a linked account. If you have a joint account then being associated with a bad account will hurt you.
Can’t see into your savings accounts (but they can see your current accounts).
Can’t see student loans unless they’re from before 1998.
Criminal convictions aren’t listed unless they’re financial ones.
Can’t see council tax arrears, parking fines or driving fines.
By having more access to credit you can find yourself with bigger limits and lower utilisation - even if you actually are borrowing more (because you’re using less of your available credit).
The age of your accounts factors into your score/rating because a longstanding relationship means you’re more reliable, all other things being equal.
Credit card companies make their money from the people who don’t pay off their balances every month so try not to fall into their traps.
Having no credit doesn’t mean you’ll have a good score - quite the opposite - you need a track record to have a good score.
A hard search affects your credit score, not a soft search.
Improving your score takes time.
Your credit score from an agency is a snapshot that’s taken once a month.
What you should do
Update any credit reference agencies to make sure you’re not associated with someone who you’re no longer with (a linked account).
You want to keep your credit utilisation below 30% - i.e. you can spend up to 30% of your limit. Being up to the limit on cards is a sign you’re in trouble to a lender.
Make payments on time
Make over the minimum payment - it looks bad from a score perspective and costs you more over the term of a loan. Check out What’sTheCost to see what we mean.
Don’t make lots of applications, particularly around the same time. You don’t want lots of hard checks which will affect your rating. You should only allow a hard search when you really need one (i.e. when you know you want a particular loan product).
Close any unused accounts.
Register on the electoral roll.
Keep all your personal info up to date.
Make sure there are no errors.
Generally, if you want to be attractive to lenders (which is the major reason you’d care about your credit score) it can be useful to think from a lender’s perspective - would you lend to someone who [has never borrowed / has struggled to pay back loans / is maxed out on their card limits?] It’s pretty common sense so if you can tick the boxes, you’ll put yourself in a good position.
