Anyone who has ever borrowed money or used credit of any kind has a credit history. This is your personal record of all loans and credit over a period of six years.
Your credit history is compiled by credit agencies to help give lenders an insight that guides them on whether an application should be approved and on what terms – such as the duration of the loan and the amount of interest to be charged.
From mortgages to credit cards, car finance to store cards, most adults in the UK will have had credit in some form or another. Factors such as how good you are at repaying your loan on time, whether you’ve missed any payments or gone over your credit limit is all recorded on your credit score. This can significantly impact the likelihood of obtaining credit in the future and the terms of any future loan.
What impacts your credit score?
Demonstrating that you can pay back money borrowed in full and on time helps to ensure your credit score is in the best possible shape. It means that loans you apply for in future may be offered under more favourable terms, so it’s certainly worth understanding how to improve your credit score.
If you currently have any outstanding credit, ask yourself whether you’re making the best use of it. Are you making regular payments on time to help improve your future credit score, or are you stretching it to the limit?
If the latter sounds more like you, think about what you can do to improve your credit score. It’s much better to take action if you’re struggling than to take no action and risk falling behind with payments. Being in arrears could result in CCJs (County Court Judgements) against your name, which can make obtaining credit more difficult for years to come.
Bear in mind that lenders do keep close tabs on customers’ credit history to ensure they are borrowing responsibly.
Duration of credit history
If you have a good credit history spanning several years, and have demonstrated that you’re a responsible borrower, you are much more likely to be offered credit at a better rate.
Special offers and discounted rates often have certain conditions attached to them in the small print that rely on you having a good credit score.
Frequent credit enquiries
Every time you apply for credit, a mark is made on your credit report. Too many hard enquiries can work against you as lenders worry you are an unsafe bet. Some comparison websites let you do a soft search that tells you which cards or loans you are most likely to be approved for before applying, to reduce the risk of a rejection counting against you.
It can also be a good idea to leave between six months and two years in between applications to a single provider if you aren’t confident of being accepted, to ensure a mark isn’t left on your report.
Your payment history will be used to help determine your credit score, so keeping up with payments helps improve it. However, if you’re paying late frequently or defaulting completely on a payment, your credit score will go down.
What can improve your credit score?
Although there are some factors that can damage your credit score, it’s worth noting that there are some things you can do to improve it. The good news is there are some simple steps you can take now, including:
Prompt payment of bills
Paying bills on time is a good way to demonstrate that you would be a safe bet when it comes to paying back credit. If you haven’t already done so, it’s a good idea to set up direct debits for your utility bills, to ensure you won’t ever miss a payment.
Clearing CCJs or larger debts
If you’ve been favouring the ostrich technique – burying your head in the sand and ignoring outstanding debts – take steps now to ensure you set up a repayment plan. Even a small amount each month can help clear your loans. The longer you leave a debt unpaid, the longer it will take to get your credit score in a good place.
Reporting mistakes on your file
Any missed payments or defaults will stay on your record for six years. This could affect your score and ability to get credit.
Check your report to identify any mistakes made by lenders – it’s possible that they could mistakenly put a black mark against your name. If this is the case, contact the lender and get the default on your file removed, or write to the credit reference agency to ask it to add a short Notice of Correction to your credit file.
Make sure you’re on the electoral roll
Being on the electoral register lets providers know you have a permanent address, which will boost your application chances – even more so if you’ve stayed at the same address for longer. Make sure you register your details at https://www.gov.uk/register-to-vote.
Demonstrating responsible borrowing
Applying for a credit card and being careful with its use can demonstrate you are a responsible borrower. Spending regularly on a credit card (under 30% of its limit) and making the repayments on time each month shows lenders you can be relied on.
By understanding your credit score, following our simple tips and demonstrating your ability to manage debt responsibly, you can improve your credit score. This will increase your chances of getting the best deals in future, whether you’re looking to take out a mortgage, get a new credit card or borrow money for other big-ticket items.
For more help understanding your credit score, visit the Know How blog.