Are you thinking about applying for credit? If so, you need to make sure your credit score is in check – and if it needs work you need to look for ways to improve it. But before you can do that, you may want to learn about the different credit reference agencies, what information they examine and what they can deem as a good or bad credit score. Our helpful guide to credit checks explains everything you need to know.
It's important to check your latest credit score before taking steps to improve it. Make sure that all the information on the report is accurate, and get it corrected by contacting the lender or credit reference agency if it isn't. TotallyMoney can provide you with a credit score and report, for free, forever. Use them to track your finances and to find lenders most likely to accept you for credit.
Get your FREE credit report with Totally Money
View your borrowing power to see how likely you are to be accepted for credit
Once you’ve got an idea of how credit scores work, it’s time to get into the nitty-gritty of your own credit history. Lenders will rate your credit profile to see if you're a suitable candidate before you'll be accepted for a loan, credit card or mortgage, and having no credit history at all can be just as detrimental as having a less-than-perfect one. But, there are ways you can improve your credit score to boost your chances of being approved…
A lot of lenders use the electoral roll for identity verification in order to combat identity fraud, so if you're not registered to vote at your current address this could cause problems. So, make sure you're registered with the electoral roll at the correct address before you even think about applying for credit. Living at the same address, being employed in the same job (with the same employer) and having the same bank account for a reasonable period will also help boost your creditworthiness.
Lenders will look at your previous credit information to decide if you're a suitable candidate, and your history becomes even more important if you're making a particularly hefty request (such as applying for a mortgage). But, if you've never had a credit card, loan or overdraft you won't have a credit history, and that could pose difficulties – how will lenders know whether you're a credit risk if they can't evaluate your past performance? That means, if you want to secure that credit agreement, it's worth establishing a positive credit history by taking out a credit card first and making a few small purchases each month. Doing so can prove your money management skills and can be a great way to build up your score, but of course, you'll need to pay off the balance on that card in full each month (ideally set up a direct debit to ensure you don’t forget to make the payment).
When you take out a joint mortgage or bank account, you become "financially linked" to the person you've taken it out with. If they have a bad credit rating, it could impact yours. If you have split up with your partner, husband or wife and/or the joint financial product you have taken out is no longer between you both, inform the credit reference agencies of your disassociation. If not, the other person's financial dealings could still have an impact on your credit score.
Try not to have credit card balances that are more than 30% of your limit – doing so could be an indication to lenders that you already use too much credit and may not be able to keep up with additional repayments, which could lead to your application being rejected. As a rule of thumb, keep balances as low as possible, while still using a bit of your limit to prove your creditworthiness.
Missed and late payments can stay on your credit file for up to six years. If you've made a late payment due to circumstances beyond your control (i.e. your direct debit wasn't set up in time), so long as you made the payment promptly when you noticed, talk to your credit provider and see if you can get this black mark removed. This also applies to late payments for utility bills like gas or electricity.
By this we mean pay off more than just the minimum payment each month. This signifies good behaviour to a prospective lender. To be managing your debt well, ensure that you're making headway into repaying what you've borrowed.
Lenders are paying increasingly close attention to the amount of credit available to an individual, and if it seems you've already got access to a lot, they might be reluctant to offer you any more. That means any accounts you don't use or need should be closed as soon as possible by, for example, cancelling a credit card that you've paid off and will no longer be using (cutting up a card isn’t enough – you need to contact the provider and officially cancel your agreement). This applies to things like unused mobile contracts and store cards too, so be prepared to go through your finances to check for anything you’ve overlooked.
If you've been refused credit by a lender, don't keep applying elsewhere. Each credit search will leave a "footprint" on your file and too many in a short space of time could indicate that you're financially over-stretching yourself (or, perhaps, that you're desperate for money and could be a credit risk), and that means providers may not approve your application. Ideally, try to find out whether you're likely to be accepted before applying, and don’t apply for products unless you really need them.
Credit builder prepaid cards can help you improve your credit rating. They charge a monthly fee (about £5) which is in the form of a small loan, which you'll need to keep paying for 12 months, but at the end they will add an entry to your credit file that you have successfully repaid the debt. A prepaid card doesn't require a credit reference as you don't borrow funds on it.
It's a good idea to regularly check your credit score to make sure everything is as it should be, particularly if you're thinking of applying for a mortgage (or other large credit agreement) in the near future, and if it isn't as peachy as hoped you'll know the areas you should focus on to improve it. It'll also highlight any discrepancies, and if you don't agree with anything on your file, contact the credit reference agency – updating your file with the correct information could help ensure you won't be refused credit in the future.
It may sound strange, but there are ways you can improve your credit score using a savings account – you just need to find the right account to go about it.
In recent years, accounts have been developed that are specifically designed to help you build your credit profile, and they work by using a loan-based system. Essentially, when you decide you want to start, think about how much you can afford to save over the next year. The provider will then lock this amount away in a ring-fenced 0% APR loan, which you have to “pay off” over the year by depositing your savings. At the end of the year, the loan will be paid off and you get your savings back, and your credit score will have received a handy boost in the process. LOQBOX is a prime example of this kind of system, offering a way to improve your credit score without actually taking out any credit – which means there are no credit checks before you start.
This depends on your own personal circumstances and how low your score is. If you’ve had significant financial difficulties that have severely impacted your credit history (such as County Court Judgment or bankruptcy) it could take years to rebuild your score, whereas if you’ve missed a single credit card repayment it may only take a few months to repair. Bear in mind that it can take some time for new information (such as a new bank account) to reach credit reference agencies, so this should also be factored in.
While it’s true that missed and late payments can stay on your credit file for up to six years, there’s no guarantee that your score will improve after this time – or, indeed, that it won’t improve before then. Negative information typically matters less and less as time goes on, though bankruptcies (for example) can stay on your credit file for longer and will be far harder to recover from. Again, it all comes down to your own circumstances.
With hard work and diligence! The first step is to go through the list above and implement any changes as quickly as possible, and then commit yourself to focusing on responsible credit use thereafter. This may include, for example, setting up direct debits so you never miss another repayment. It’s worth remembering that your score won’t instantly be improved once you settle the default, though its impact will lessen over time.
No – debt consolidation doesn’t typically improve your credit score, and student loans don’t appear on your credit record.
At its most basic level, showing effective money management by making a few small credit purchases and paying them off swiftly can help boost your score, but it’s important to choose the right card to help – and opting for those that have been specifically designed to help rebuild your score can often be the best bet. Credit repair cards can help rebuild your profile (provided you keep up with the repayments) and typically come with a low credit limit to ensure you don’t overspend, and they aren’t off-limits to those with less-than-perfect credit scores.
Potentially – if used wisely. Klarna is one of a growing number of “buy now pay later” (BNPL) schemes that allows you to shop online and pay for your goods later, either giving you a 30-day deadline to pay the full amount or letting you split the cost into three interest-free payments. There’s also the option to extend your financing over a period of up to 36 months, which may incur interest charges. Provided you pay off the amount in time, it could help to improve your score – much like when you keep up with payments on other forms of credit, it shows that you’re a responsible credit user – and as long as you don’t seek extended finance, you’ll only have a soft check on your profile, which won’t show up on your report. Klarna even says that your score won’t be affected if you miss the 30-day BNPL deadline. However, bear in mind that if you use the extended financing option too frequently (which will show up on your report) and/or repeatedly miss these repayments, the opposite could be true, and it could have a negative impact on your score.
If you are refused or declined credit, you are entitled to know the reason, as well as the name of the agency that provided your credit reference. Read our guide to credit checks to learn more.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.