Understanding Your Credit Report and Improving Your Score
Two of the most important things you can do when it comes to managing your personal finances is to get to grips with your credit report and take steps to improve your credit score. Read on for our quick guide to all things credit
What is a credit score and why does it matter?
The world of personal finance is rife with jargon and acronyms, but if there’s one term you need to know it’s credit score. This three-digit number is used to represent how you manage money and is linked to information stored on your credit report.
While it’s not the only factor that lenders will consider when weighing up whether to give you a loan, mortgage, credit card, or any other type of finance, it is important.
Having a good or excellent credit score could also help you unlock the best interest rates. On the other hand, if your credit score is categorised as poor and could do with some attention, you might find it harder to secure credit.
How is a credit score calculated?
In the UK, there are three different credit reference agencies and each of these agencies calculates your credit score slightly differently.
They keep the exact formulas they use close to their chest, but factors that can affect where your credit score lands include:
- Your payment history
- The number of applications you’ve made for credit
- How long you’ve lived at your address
- How long your accounts have been live
- Whether you’ve had an IVA or CCJ
How can I check my credit report?
If you’re curious to know where you stand, you can check your credit report. It’s worth doing this with each of the three credit reference agencies as you might have a different score with each of them (they also use different scales).
The good news is that you can check your credit report for free. You can create an account with Experian to see the score they hold for you but for TransUnion and Equifax you’ll need to use third-party sites. For TransUnion, visit Credit Karma and for Equifax, log in to ClearScore.
Once you’ve logged in, you’ll usually be able to see the key details affecting your score, what your score is, and what band it falls in (from poor to excellent).
How can I improve my credit score?
It’s important to know that your credit score is never fixed. No matter what your score looks like today, you can take steps to improve it. It may take some time but making a concerted effort to build your credit score will eventually pay off.
Credit scores aren’t an exact science, but here are a few things that could help boost your score:
Register on the electoral roll
One of the quickest and easiest ways to improve your credit score is to register on the electoral roll. You can do this online in just a few minutes and it should be part of your moving house checklist each time you have a new address. When it comes to credit scores, the longer you stay at one address, the better as it shows lenders that you’re settled in one place (and they can find you easily if you default on the loan!)
Keep your credit utilisation low
Lenders are looking for borrowers who manage their money responsibly and one way to show this is to keep your overall credit utilisation low.
What does this mean in practice? Ideally, you would only need to use a third of the total credit you have available to you. For example, if your credit card limit is £9,000 a month, you won’t spend more than £3,000 on that card.
If you do max out a credit card, don’t panic; this might cause your credit score to dip temporarily but if you pay the balance in full and can get your credit utilisation down for the next few months, it should quickly recover.
Be mindful of hard searches
When you apply for a type of credit, the lender will usually run two types of searches to check your credit score.
The first is a soft credit check. This is a high-level look at your credit status and won’t impact your score. It will be listed on your report but won’t be visible to other lenders.
If you decide to progress with an application, the next step will be a hard search. This type of credit check will be listed on your credit report and is visible to others for up to 12 months.
While there’s nothing wrong with having a hard search on your report, having more than one in a short window of time can be a red flag to lenders. Rightly or wrongly, they tend to assume that this means you’re relying too much on credit and might not be a very reliable borrower.
If you can afford to take some time between your credit applications – ideally at least six months – then you could keep your credit score in better shape.
Make payments on time
Arguably the most important thing you can do to improve your credit score is make all your payments on time. Of course, that’s sometimes easier said than done.
If you have the money to cover your repayments but struggle to make them on time, it could make life easier if you set up direct debits to automate each payment and ensure you never miss a due date.
If you don’t already check your credit score regularly, this is a great habit to adopt if you’re looking to improve it. Not only can it make you more aware of what your score looks like and when it fluctuates, but it can also help you spot any mistakes.
Check your credit score regularly
When you’re reading through your report, you might come across errors either in your payment history or in your personal details that could be dragging your score down. If you spot an issue, contact the relevant credit reference agency as soon as possible to get it fixed.
Looking for help managing your debts so you can improve your credit score? Our friendly team of experts is here to help. Give us a call on 0161 8260 585 or send a message here