You’re probably aware that you have a credit rating, even if you’re not totally sure what that score is or might mean.
We’ll explore what your credit rating actually is, what it means to you – and some quick tips on how you can improve it quickly and simply.
How is a credit rating calculated?
Although the term ‘credit rating’ is used a lot – it’s probably more accurate to use the term ‘credit score’ – as this is the tool that lenders use to decide whether or not you’re eligible for a particular financial product they offer.
This score is calculated based on your credit file – a centralised record of all your credit related financial activity that all financial services can access. Using this information, lenders can decide how likely you are to pay back any money that they allow you to borrow.
Lenders tend to base your future financial conduct on how you’ve handled money in the past, so essentially, the higher the score, the more likely you are to repay the money and the lower the risk you represent to that company.
Each lender’s interpretation of the score is different though, so you should understand that a ‘no’ from one lender doesn’t mean the next lender will necessarily have the same answer. While your credit score might not preclude you from borrowing – it can sometimes mean that lenders will offer you a slightly higher rate of interest or different terms – simply to limit the risk they’re exposed to.
What impacts your credit score?
There are a few factors that impact your credit score, they include:
- Your history of financial products and your repayment behaviour
- The number of times you’ve had ‘credit searches’ done – i.e. how many times you’ve applied for finance
- How much credit you’re using, compared to how much is available to you
- Public records that relate to your finances – such as county court judgements, bankruptcy, etc.
How can you improve your credit score?
After reading this you might be under the impression your credit score is carved in stone until you’ve made more repayments or settled some debt – although in actual fact, there are a number of steps you can take right now that could improve it.
Consider the following if you’d like to boost your credit score:
Halt your applications
Each time you apply for credit a record is kept on your credit score. If these begin to add up, it can look like you’re applied or been accepted for credit in numerous places – which can make lenders wary of offering you more credit.
If you’ve been declined for credit recently it will be worth holding off until you apply again. Work through the rest of the tips on this list and, when you’ve done everything you can to boost your chances of being successful, go back again – rather than applying numerous times with different lenders.
Does your credit file have any mistakes?
You don’t have to sign up to expensive monthly services to get your hands on your credit file – in fact, you’re entitled to a copy of your statutory credit report – and should only cost you a small £3-£4 administration fee to do so.
When you apply to get your credit file, you should make sure you include any past addresses you’ve been registered at – even if you don’t remember having credit when you were there. When you’ve applied for credit, made payments or cleared debt, your record is updated – but mistakes can happen.
Check your report carefully – and if there’s anything you’re unsure of, question it with the lender it relates to. They’ll flag the record as being under investigation – and it won’t impact your chances of getting credit until it’s fully investigated.
Are there any signs of fraud?
It’s not just mistakes you might find on your credit report – sometimes you’ll find evidence that your identity and credit score has been used fraudulently to obtain goods or services without your knowledge or permission.
This is quite rare – but not impossible, so check there’s nothing on your credit file that’s unknown to you. Again, if there is, get in touch with the lender involved – they’ll be able to advise you further.
Try not to worry if this is the case, there are full national police departments who handle this kind of crime all the time – and can usually fix the issue for you very quickly.
Are you registered to vote?
Having a permanent registered address is one of the key indicators that lenders look for when they’re deciding whether or not to lend you money.
While that might sound obvious – it’s amazing quite how many people forget to change their address with the local authority or electoral register in the midst of moving house. If you’re not registered at your address to vote, try to get signed up as quickly as possible – your credit score will thank you for it.
Do you have any credit you’re not using?
You might think that having a credit card sitting the drawer in case of emergency is a good plan – but actually, it can prevent you getting credit elsewhere.
This is because each person has a total amount of credit they can access – and a lender doesn’t base their decision to lend to you on whether or not you’re using that credit – instead, whether or not that credit is available to you immediately.
So, in essence, a credit card with a £5,000 limit would mean you’ve got £5,000 less to borrow elsewhere. If you’re unlikely to use it – or if the credit would be more helpful elsewhere, cancel the card with your provider and you’ll be free to access a stream of credit elsewhere.
Do you have any debt you could clear?
Outstanding debt impacts your credit rating – so if you know there’s an amount outstanding that could be easily cleared, you might see a significant boost if you deal with it sooner rather than later.
Credit cards and store cards can be difficult to clear completely unless you keep tabs on the repayments – often the repayment amount will reduce and there are instances where you’re just paying off interest – without actually clearing the amount you owe.
The good news is, saving on interest isn’t the only bonus when you clear any outstanding debt – a repaid loan or credit card balance is another indication that you’re less of a credit risk – so can boost your credit score even further.