For many of us in the UK, our dependence on debt is rather varied, but with recent figures showing that household debt has moved up to £40 billion, it’s fair to say that few of us are lucky enough to avoid it entirely in our lifetimes. But whether you’re looking at getting a mortgage, a loan or even just a credit card, one thing that is so crucial is your credit rating.
So what does this important, and seemingly unquantifiable, score entail exactly? And how difficult is it to improve? The good news is that the whole thing isn’t as complex as you may think, and the power is in your hands, to a great extent…
Why it matters
It is the single most important determinant for whether you get approved for both secured and unsecured credit, and, in the case of the latter, it is vital in determining the cost of borrowing and the rate at which you will have to pay the loan back. After all, it is the best way for the lender to gauge your ability to pay off debts – you promising to do so doesn’t count for much!
What affects your score?
- Missing payments and CCJs: Late and defaulted payments on anything; be it card repayments, bills, your mortgage etc. will remain on your file for up to six years. So too will any County Court Judgments (CCJs) on an unpaid bill.
- High level of present debt: If you’re already well into the red, it will generally count against you when applying for another loan as it can show you as irresponsible.
- Moving house often: If you’re always on the move, it can be interpreted as transience, and will almost definitely count against you as a loan applicant.
- Financial Association: If you’re tied to accounts or cards with someone who has a poor credit history (for example, a joint account with a spouse) this will affect your chances of gaining credit too.
- Errors on your file: Unfair as it may seem, mistakes do happen. Perhaps a late payment is incorrectly recorded, or someone fraudulently applied and defaulted on a loan pretending to be you. Either way, it can hurt your credit file.
- Applying all at once: If you go on a rampage of applying for loans, it can leave a footprint in your file if the lenders you apply with conduct a ‘hard search’ on your credit report. This, in turn, can show you as credit hungry, and inflate the rate of interest you have to pay – or result in you being declined altogether.
How to improve it
It’s actually pretty easy to start getting your house in order, and some of the quick fixes follow from the above. Obviously it goes without saying that you should make sure to pay your debts on time, and reduce pre-existing debt where possible.
Yet there are other easy score boosters too. Be sure to register on the electoral roll, even if you don’t vote. This will make you easily trace-able to a lender, and make you seem more reliable as an applicant. However, one problem some people encounter is that they have no credit history at all, which is of equal hindrance to a bad one. If this could be the case with you, it might actually be worth expanding your lines of credit as much as possible, in addition to increasing the variety of obligations you have such as mobile phone contracts. This is all in order to demonstrate your ability to budget sensibly for all your outgoings.
Finally, the one bit of advice which will require a small amount of admin on your part is to get hold of your credit report. It costs as little as £2 (or even free of charge), and you can get it online from any of the three main credit experts in the UK (Experian, Equifax and Callcredit). It will give you a good idea of what goes into your score, but, more importantly, you can check for any errors too. If you do see something that looks amiss, you can file a ‘notice of correction’ to put it right.
Minimum effort for a helpful reward
As you can see, it’s all pretty straightforward, and doesn’t require much in the way of time or money from you to optimise your credit score. It’s just about making a few little tweaks, and ingraining good habits going forwards. You just never know when it will come in handy in the future.
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