It’s time to get to grips with your credit score.
When you apply for any kind of loan – whether it’s a new credit card, a phone contract, an overdraft or a mortgage – the lender assesses your credit score to work out whether they can trust you to pay the money back. That’s all a credit score is – a measure of how likely you are to pay back any money you borrow. But there’s a lot more to it than that and, boring as it sounds, having a good credit score is pretty much essential.
Your credit score
You don’t have a universal credit score – each lender or bank assesses you independently before deciding whether to lend you money. They do this by looking at your credit report, which includes details of your bank accounts, loans, bill payments and other public information such as your name and date of birth.
There are three main companies in the UK that use your credit history to compile credit reports: Experian, Equifax and Callcredit. You can ask any of these three companies for your credit report. They might also give you a ‘score’, but it’s unlikely to be accurate and you shouldn’t pay too much attention – it’s the report itself that matters.
How they work it out
When you apply for a loan or open a bank account, the lender does a credit check on you. That means they take all of the information on your credit report and run lots of calculations on it, to try and predict your future behaviour. It’s designed to provide an overall picture of your current and recent behaviour. If you score highly and they decide you’re a safe bet, you’re likely to get approved. If not…
What affects your score
If you have low credit rating, it’s usually because you’ve used credit unwisely in the past or because you just haven’t used credit much at all. If you you’ve never borrowed money before, it can be really hard to get credit because there’s no proof that you can use it properly. Your credit report flags up any potential warning signs to lenders, such as missed payments or loan defaults.
Most information is only held on your file for about six years, because lenders only want about your recent behaviour – they don’t care what happened a decade ago. There are some things that people mistakenly think show up on their credit report – including ‘soft checks’ such as the one we carry out to verify your identity you sign up to Chip. Ditto your salary, savings and student loans – lenders can’t see any info on these and they don’t affect your credit score.
Why it matters
Put simply, your credit rating affects whether a bank approves you for a loan, and the rate of interest you pay. It’s helpful to break this down into why you definitely don’t want a bad credit score, and why it’s a bonus to have a great one.
A low credit score can stop you getting access to credit of any kind. Mortgages, phone contracts, car finance, overdrafts, credit cards…they’re all hard to get if your credit score is low. However, the idea that there is some kind of ‘blacklist’ is wrong. Just because one lender has rejected you, doesn’t mean they all will. Plus, there are some types of credit specifically designed for people with poor credit history, to help build it up.
It’s great to have a high credit score, because it means you’re in demand. All the lenders will be falling over themselves to get you as a customer. That gives you leverage – you get lower interest rates on stuff like loans and credit cards, and you might even be offered incentives.
How to improve it
The good news is there are plenty of easy things you can do right now to start building your credit score, or improve it if you’ve had knocks in the past.
Register to vote
It’s important to be on the Electoral Roll, otherwise you won’t be approved for any kind of credit. If you’re not eligible to vote in the UK, send proof of address to the three main credit reference agencies (Experian, Equifax and Callcredit) instead. It’s also a good idea to register yourself at the same address across the board, including with your bank, because it makes you look more stable. If you’re a student or you’re moving around a lot, use your family address.
Pay your rent on time
If you’re a renter and you pay on time each month, you can make this count in your favour on your credit file. The Rental Exchange is a free scheme for private renters in the UK. This is particularly helpful if you’re young with little or no credit history. You just need to sign up, and then you pay rent to Credit Ladder who passes it on to your landlord – and notifies Experian that you paid on time.
Cancel unused credit cards
When it comes to applying for new lines of credit, having too many open looks bad. If you have a lot of old store cards and credit cards that you don’t use anymore, make sure you cancel some of them. However, having no evidence of past credit use will also count against you so don’t rush out and cancel credit cards that you do actually use. Another tip – if you’ve had a bank account for years and it has a good credit history, you should keep it open as evidence of your stability.
Use credit wisely
Showing that you can borrow money and pay it back on time is key to building your credit score. For people just starting out, this might mean dipping into a free or arranged overdraft and then going back into the black on payday. You should also consider getting a credit card for regular purchases and paying it off in full each month. Never take a payday loan – the lender might claim that repayments will improve your credit rating, but in reality it’s a big black mark on your credit history.