What is a credit score? Why is it important? How do you improve it?
A credit score is a number that indicates to lenders how safe a person is to lend money to. These scores are calculated by credit reference agencies, who gather financial information about people.
These agencies allow lenders to see the information they hold about individuals (with their permission). Lenders can then assess whether they are suitable to lend money to.
The three main credit reference agencies in the UK are Experian, Equifax and Callcredit.
Your credit score can affect applications for everything from a credit card to a mortgage. So it’s important that you keep yours in good shape.
Your credit report is a detailed list of your financial history. Your credit score is worked out from this information.
How do I find out my credit score?
You can find out your credit score by making an account with Experian, Equifax or Callcredit. Experian charges £14.99 and Equifax charges £9.95 per month for their services. Callcredit has a service called Credit Compass which charges £14.95 per month.
They’re all quite expensive. The exception is Noddle, which is also administered by Callcredit, but is free to use. Instead of charging a subscription fee, it makes money through advertisements. It also receives commission from providers whose products appear on its comparison service.
The credit scores provided by these agencies give a decent indication of where you sit on the scale of credit-worthiness. They can’t, however, give completely accurate suggestions of products you'll be eligible for.
What does my credit report affect?
Your credit report is a record of your finances over time. It details how well you’ve managed past accounts and will also display any past problems to lenders.
It affects your ability to get credit. In other words, a good score means a lender is more likely to lend you money. In turn, a bad score means you’ll be seen as a risk, and many lenders may shy away from you.
Why do I have a bad credit score?
A bad credit score can be the result of missed payments, bankruptcy, or having a County Court Judgment made against you.
If you only ever make minimum payments on your credit cards and loans, this will also act as a warning to lenders. They may see this as a sign that you're struggling to pay money back.
If you’ve never borrowed money before, you won’t have a great credit score either. This is because lenders have no evidence that you can manage money well.
It’s important that you start to build (or rebuild) your score so that lenders see you as less of a potential risk. They will then be more likely to offer you credit.
How do I improve my credit score?
There’s no quick fix for a poor record. You need to prove that you are consistently good with money so that lenders will trust you in the future.
The first step should be setting up a Direct Debit for all of your credit agreements, to ensure you never again miss a payment.
Another key thing you need to do to improve your credit score is register on the electoral roll. Being on the electoral roll is a sign of stability, which is something lenders value. Lenders also check it when doing ID checks, to ensure the application is not from someone impersonating you. Contact your local electoral registration office to register.
Make sure that all your accounts are registered to the right address. This will help lenders be more certain of your identity.
You should also take a look at credit cards designed for people with poor credit history. These ‘credit builder’ cards charge high rates of interest, so pay them off in full every month. Used responsibly, they’ll let you prove that you’re a responsible borrower.
Cancel any unused cards. The more you have, the more access to credit you have. Lenders may perceive you as a bigger risk if you have a lot of credit already available. Although it shows that other lenders have accepted you, it also means you could take on a lot of debt.
What to do if you get rejected
If you get turned down by a lender, do not immediately apply to another. Lenders can see your applications but they cannot see if you were successful.
Lots of applications for credit in a short space of time (even if they were all successful) will make you look desperate for money. With this in mind, they may question whether it would be a good idea to lend to you.
First, ask the lender why they turned you down. They aren’t bound by law to provide an answer to this question but most will give a general idea. It might be something as simple as the fact you made a minor error while applying.
It might be something more complicated, but you may be able to do something about it. Once you have identified the issue, then you can take action. Once you have fixed the problem you can re-apply.
How to fix mistakes on your record
If you spot a mistake on your credit report, contact the lender who has supplied that information to the credit reference agency. They may be able to rectify the problem by themselves. They should then get in touch with the credit agencies, who will amend your report.
Equifax has a good guide on what further steps you can take if the problem remains unresolved.
In the meantime, you can place a 200-word ‘notice of correction’ on your credit report. This gives you the opportunity to tell your side of the story and lenders will see this. You should send a copy of this to all three agencies, as they may not have exactly the same information as each other.