Do you know your credit rating? It’s an important financial score that lenders use when you apply for any kind or credit – a mortgage, a personal loan, finance for a new car, even a mobile phone contract or new credit card. If you’re not familiar with the concept or want to know exactly what your credit score means, this useful blog post from Guarantor Loans UK will tell you all you need to know.
Interestingly, there is no single rating or score that lenders use to assess credit applications. The three credit reference agencies (CRAs) – Equifax, Experian and Callcredit – take the financial information they have compiled about you and come up with a figure that indicates your relative credit worthiness.
And just to make things even more confusing, each lender has their own way of deciding whether or not they’re happy to lend to you, using your credit score as the basis. Here’s a handy table to show you how which CRAs are favoured by different lenders. Bizarrely, this means that your application could be rejected by one lender but be accepted by another!
If you’re worried that your application for credit may not be approved because your credit score may be too low, or you’ve been turned down for finance in the past, you need to take action to increase your score. Here are 6 steps you can take to improve your credit rating.
If you haven’t done so already, your first task is to obtain a copy of your credit report. All CRAs have a statutory obligation to provide you with a copy of your own credit report, which you can ask for in writing or by accessing your report online. You will be charged £2 for the pleasure, unless you sign up with Noddle (who use Callcredit data) or ClearScore (who use Equifax data), both of which offer free access to your credit report for life.
Reading your own credit report is an interesting exercise in its own right (were you aware that all this data was compiled about you?) but it also gives you the opportunity to verify details and report any mistakes. If anything is incorrect, notify the company (and the CRA) as soon as possible so that the mistake can be rectified and won’t adversely affect any future credit application.
It’s good practice to check your credit report at least once per year, so you know what your credit score is and that all the information on record is correct.
Are you on the electoral register? If you’ve not bothered or only recently moved home, you can register to vote online at any time by visiting their website. It only takes a minute, so you may as well get it done now.
Why is this important? Well, lenders use the electoral register as a reference to confirm that you are resident at the address given in your credit application. If you’re not registered as living there, you may find it very difficult to obtain credit.
Luckily, it’s a small thing that’s easy to rectify with minimum fuss.
Ensure that your credit history isn’t inadvertently blighted by past associations. What do we mean by this?
While merely living with (or being married to) a partner with a bad credit rating won’t affect yours, if you have a joint financial product (like a joint account or a joint mortgage), there is a financial association between the two of you, meaning your partner’s credit score will be a factor in determining your own score. Lenders may well take a look at both your credit reports when deciding whether to lend to either of you, since the financial circumstances of one person may affect the ability of the other person to make repayments.
If you’ve ever had such a financial association with someone that you’re no longer in a relationship with, you should ask all three CRAs to break the link, so that your ex’s financial situation no longer has any impact on any credit application you want to make going forward.
If you’re planning to apply for credit, it’s a good idea to stop and think before you act. Why? Each time you make an application (successful or otherwise) you leave a fresh footprint on your credit file that other lenders can see.
Firing off several loan applications in short succession in an effort to get credit may give the impression (justified or otherwise) that you are in financial difficulties, which in turn may make lenders wary about letting you borrow from them.
What’s more, applying for credit just after you’ve changed jobs or moved home may not be a good time, since lenders prefer to see a period of stability to indicate a lower lending risk.
Before committing to making a full new credit application, ask to carry out a ‘soft credit search’ or ‘quotation search’ first, especially if you’re shopping around for the best deal on a mortgage. This will give you an indication of likely success in being accepted but without leaving a visible trace on your credit file.
Lenders will want to see evidence of your ability to manage your finances well. In order to assess your credit worthiness, they will look at how you are repaying your outstanding balances, but they will also look at your level of debt overall.
With this in mind, try to keep your credit utilisation low, ideally comfortably below 50%. If you’re not sure how much of your available credit you’re currently using, your credit report provider should be able to tell you the information.
The less credit you need, the more prospective lenders will see this as a sign that you’re handling your finances sensibly.
Using credit responsibly is a key element to help you build a healthy credit score. Lenders will want to see that you can repay your debts on time and stay within the given credit limit. If you don’t have a credit card, or never borrowed any money before, this may actually count against you. Without any hard and fast evidence to see you act as a responsible borrower, lenders may be reluctant to view you as an acceptable risk.
One solution is to take out a credit card and use it for moderate amounts of spending, making sure you pay off the balance every month. This is an excellent way to demonstrate that can be trusted to pay back any money you owe.