In this article I explain how your credit score works and the steps that you can take to improve it as quickly as you can. Improving your credit score requires a number of steps over an extended period of time. However if you want to quickly find a simpler solution to start improving your credit rating then you may want to jump to the foot of this article and read the section titled the "A simple way to improve your credit score".
The tendency is for most people to only think about their credit rating when they are looking to access some form of credit like a mortgage or loan. However we should all view our credit rating as something that we continually manage by reviewing it periodically and taking action to improve it where necessary. In order to do this effectively, it is important to understand what a credit score is and how it is calculated.
What is a credit score?
There is a lot of confusion regarding how you find out your current "credit score" or "credit rating" and how this figure is calculated. The reality is that there is no such thing as a universal credit score for each of us and there is no credit blacklist that those with poor credit history are added to.
Credit scoring is carried out by individual lenders and if you have ever applied for a loan or credit card you will almost certainly have been 'credit-scored' during the application process to assess your creditworthiness. The actual process of credit scoring will differ between banks & building societies but the purpose of credit scoring is to ascertain how well you deal with your personal finances and whether you are a good credit risk.
One of the most important elements of improving your credit score is checking your credit file. Lenders will access your credit file held by credit reference agencies which will contain the following information about you:
- Name, address and date of birth
- How much money you currently owe to lenders
- Any late or missed payments or defaults
- Any County Court Judgements (CCJs) against you
- If you have been declared bankrupt
- Details of any joint credit agreements you have with other parties
You can obtain a copy of your credit files by applying to the credit reference agency and you should check to ensure that all the entries are correct. If you find any errors you should get them amended as this will help improve your credit score. Many credit agencies like Experian, Equifax and Clearscore now offer free credit rating checks but be sure to check the terms and conditions when applying as some services may start charging you after a free trial comes to an end. Check out our Millennial Money video below where Lauren and Damien give 6 top tips on how to improve your credit score.
How is your credit score calculated and what is a good credit score in the UK?
In assessing your credit score a lender will use information from a number of sources which includes what you have disclosed on the credit application, what is contained on your credit file and any previous credit history with the lender.
Your credit file will contain details of your credit history such as loans, credit cards, mortgages and car finance. Recording the amount of the loan and whether you paid your instalments on time. Therefore maintaining an excellent repayment record on current loans is vitally important for your future creditworthiness so always make sure you at least pay the minimum monthly repayment amount to avoid any adverse impacts to your credit rating.
As was mentioned above there essentially is no universal credit score and therefore there is no "good score" to benchmark yourself against. However, by accessing and managing your credit file you can help improve your creditworthiness.
What does your credit score impact?
Your credit score is used by a whole host of companies in assessing your ability to repay a loan or pay a bill on time. Having a poor credit history can therefore impact most aspects of everyday life, which is why it can feel like there is a credit blacklist rejecting your applications again and again even though it doesn't exist.
There are several key areas of everyday life that are impacted by your credit history and these include:
A poor credit rating will almost certainly prevent you from obtaining the best mortgage rates and will often prevent you from being able to obtain a mortgage at all.
A number of utility companies share customer data with credit agencies which means that the way you manage your utility payments can impact your credit file and your chances of successfully applying for credit with other organisations. So whilst late utility payments could negatively impact your credit history conversely managing your payments effectively with utility companies can also improve your creditworthiness.
Home and car insurance
Few people realise that by opting to pay their home or car insurance in monthly instalments the insurance company is effectively loaning you the policy cost upfront and spreading the cost over 12 monthly instalments whilst charging you interest in the region of 20%. Therefore you are essentially entering into a credit agreement and they will carry out a credit check before accepting you as a customer.
Loans and credit cards
Your credit score does not only influence whether or not your credit card or loan application will be accepted. It also impacts the APR you will be charged if your application is successful and whether you are eligible for any promotional rate that may have caught your eye when you first applied.
If you are turned down for a credit card, check out our article "5 things to do if you're turned down for a credit card".
Mobile phone contracts
Mobile phone operators will also carry out a credit check on all potential new monthly contract customers as they recoup the cost of the handset you receive over the course of your contract with them.
Shopping catalogue accounts
By allowing you to pay for goods over time shopping catalogues will always carry out a credit check when you apply to join.
The use of credit scoring for a range of bills and services means that in order to maintain and improve your creditworthiness you must ensure your bills are paid on time.
Why would you be refused credit?
You could be refused credit for a number of reasons which typically involves one or more of the following:
- You cannot confirm your identity or where you live
- You cannot confirm your occupation or income
- You have irregular income
- You have defaults recorded regarding previous credit
- You have incorrect entries on your credit history
- You have a lot of existing credit arrangements
- You have had a number of jobs in a short period of time
- You have lived at a number of addresses in a short period of time
Anything you can do to improve the above areas will improve your credit score quickly.
The things that can negatively impact your credit score
There are a number of issues that can negatively impact your credit score including:
- Having a number of credit cards or credit agreements
- Have credit cards that are always used up to the credit limit
- Late or missed payments on a credit card or credit agreement
- Default on a credit agreement
- Failure to disclose relevant information
- Using just one type of credit such as credit cards
- High number of credit applications
- Refused credit
Anything you can do to improve the above areas will improve your credit score quickly.
How can you improve your credit score quickly?
Building your credit score fast will require a determined effort by addressing a number of areas of your personal finances:
- Get yourself on the electoral roll, even if you have no intention of voting, the electoral roll is how most lenders confirm your address
- Check your credit file to make sure all the information is accurate and make sure that any errors are amended
- Don't change job or address just prior to applying for credit, lenders like to see stability in applicants
- Close any unwanted or unused credit card accounts
- Keep payments up to date on all bills, not just credit cards
Less is More
- Don't take out any more credit
- Don't use any overdraft set up with your bank if possible
- Don't go overdrawn at your bank
A simple way to improve your credit score
I am always extremely cautious about any service that offers a guarantee to improve your credit rating. If you follow the steps outlined above your credit rating should improve in time without the need for such services. Having looked at a number of companies that claim to offer you help I was pleasantly reassured by Credit Improver being regulated by the FCA meaning that any complaints made about the service can ultimately be referred to the Financial Ombudsman to consider.
Credit Improver's service works by you agreeing to purchase a book from them which you pay for by entering into a financial agreement to pay for the book in monthly instalments. The first instalment is for £14.99 and the subsequent 11 instalments cost £9.99 per month. Credit Improver shares its credit data with credit agencies Experian, Equifax and TransUnion (formerly CallCredit). By making monthly repayments you should see your credit score start to improve over time. The book itself is a credit improving tip book but really just exists to justify a transaction to allow you to enter into a credit agreement with Credit Improver. In reality you are essentially paying to have evidence of a good loan repayment recorded on your credit file which in turn should be positive for any credit score.
They claim that the £9.99 monthly amount is important as it is twice the minimum monthly repayment of sub-prime credit cards so should demonstrate to lenders that you can comfortably manage credit. They also offer a money-back guarantee to improve your credit score with the three credit agencies mentioned above or they will give your money back. You may also cancel your loan at anytime, return the book and no further payments will be taken.
However, Credit Improver is clear on its website that their service is not intended for people who have existing debt problems and issues meeting credit repayments. The service is aimed at individuals who have limited or no credit repayment history rather than those who have a history of poor repayment. In addition, if you default on any payments to Credit Improver this will obviously have a negative impact on your credit rating. So if you meet the criteria outlined on Credit Improver's site then it may be worth considering.
A simple way to improve your credit score for free
LOQBOX is a free service that allows you to lock money away each month with a view to improving your credit score. Once you have decided on the amount you wish to save each month (Between £20 and £200 a month), LOQBOX will create a 0% loan for the total value. If you were to commit to £20 a month, LOQBOX will create a 0% loan for £240. Each time you pay a monthly repayment, LOQBOX will report it to the three major credit reference agencies, which shows them you can handle credit and in turn should improve your creditworthiness.
Once your 0% loan has been fully settled, your loan can be paid back to you in full, so long as you choose to open a savings account with a bank that LOQBOX has partnered with. LOQBOX earns a referral fee for each new bank account opened and is how it earns money. If you would prefer not to open a new savings account, you can choose to have the money repaid to you directly, but LOQBOX will charge a £30 administration fee (and so you will receive £30 less than you paid in). Before considering LOQBOX you need to make sure that it is right for you as it is another monthly commitment and so any missed payment could harm your credit history. LOQBOX does allow you to settle a loan early so long as you contact them first and this will ensure it does not affect your credit history.