Credit scoring is one of those mysterious things that happen beyond the bounds of our daily lives. It’s most certainly not a sexy topic, however, if you are able to look past the tediousness of finding out your credit score and take steps to understand the reasons behind it, there are tremendous benefits to be gained.
By taking control of the processes that determine your credit score, you will potentially be able to save thousands of pounds. The potential errors can range from something as small as a mistyped address to some that have a serious negative impact, such as someone fraudulently using your identity.
What is a credit score?
Your credit score is an indicator of your financial health, and it the primary reference point for lenders when you apply for credit. Your credit score will help them to determine:
- Whether to lend to you money;
- How much they can lend;
- What interest rate to charge you.
Your credit score is a combination of a number of factors and the scoring system differs between the credit scoring agencies. There are 3 agencies in the UK, Experian, Equifax, and Callcredit. You can request the full details of your credit file from the agencies for £2, or alternatively, there are third-party providers such as Clearscore, Noodle, and the MSE Creditclub.
What will impact your credit score?
Why is it so important to keep a healthy credit score? Because the day you need credit, you don’t want to have to wait for months to get a better credit score. You will want to apply now, and get an answer in a matter of days, or even minutes.
It’s important to keep a healthy credit score because if there does come a time when you need credit, be it to finance a car, a medical procedure, or do home improvements. Information that is most recent will have the largest impact on your score. This will go back 6 years from the current date with the most recent being given the most weight.
The main factors that influence your score are as follows:
- The total amount that you currently owe to lenders;
- Any missed payments;
- Any outstanding County Court Judgements (CCJs) against you;
- If you’ve been declared bankrupt or have entered into a Voluntary Individual Arrangement (IVA);
- If you are registered on the electoral roll at your current address.
How to improve your credit score
There are a number of ways that your credit score can be improved. Keep in mind that improving your score will require planning, consistent action, and a little patience. All going well, you should see results in a couple of weeks. The best ways to improve your score are as follows:
- Obtain your file and check for mistakes. This is probably the easiest and quickest way to improve your score. Even having a slight mistake on your address can impact your score, so check for errors and report these to the credit agency.
- Pay your bills on time. Paying your credit card, phone or utilities bills on time demonstrates that you can be a reliable borrower and when done consistently, will improve your credit score.
- Register on the electoral roll. The credit agencies use this to verify your identity and address. If you are not registered, you will find that your credit score is likely to be lower.
- Check for links to another person. Sometimes your credit file will be linked to a partner, spouse or family member. If they have a poor credit record, this could negatively impact your score.
- Avoid County Court Judgements. Having CCJs against you will have a serious negative impact on your credit score. Avoid financial arrangements that could result in a CCJ, and if one is issued against you, make sure that you pay it promptly.
- Maintain a permanent address. If your address changes a lot, this will negatively impact your credit score. The longer you are able to stay at an address, the better it is for your score.
- Lower your existing debt. It is best practice to lower or eliminate your existing debt before applying for further credit. Remember that this will take some time to be reflected in your score so pre-planning is a good idea.
Understanding and maintaining your credit score is a serious matter that should be done on a regular basis, regardless of whether you need access to finance in the foreseeable future. As a minimum, obtain a copy of your credit report and make sure that the information is accurate. With a small amount of time invested, you can ensure that your credit score remains healthy and that you will be able to access finance at short notice if you should need it in the future.