What is a credit score?
Your credit score is a number that describes how likely you are to repay a loan.It defines your credit worthiness and is a summary of your credit history. Lenders will use this number to see what shape you are in before deciding if to loan you money.Your credit history is made up of all your past credit activity and anything recorded stays on there for 6 years. The higher your credit score the more likely they are to grant you credit. So in this case, the bigger the better!
Why your credit score is important
Your credit score is important as it is one of the main aspects lenders will look into before they offer you credit. It is also important as other entities aside from lenders use your credit score before determining if they want to deal with you. E.g landlords and employers.
Your credit score is a summary of your credit history. It reflects your repayment history and other factors relating to your credit file. e.g the number of products on your file or your level of stability which can be determined by the number of addresses registered on your file or how often you use available credit and by how much. In truth, there are so many data points that it is currently not completely clear how each credit reference agency works out your exact credit score.
How does your credit file affect the loan you get?
Your credit score is important because it significantly affects your ability to get a mortgage, credit card, car loan or personal loans and at best a bad credit score can leave you with bad rates and cost you more in monthly payments or cause you to get rejected by the lender. Someone with a great credit score and record might get a 1.9% rate whilst someone with an average score might get a 3.5% rate and that affects the monthly payments by almost 50% when comparing like for like Mortgages, loans etc
When you apply for a loan the lender will check your file for a variety of factors including:
- How many missed payments have you had
- How many addresses have you had in the past
- How many searches have there been on your credit file recently
- How many credit accounts do you have open
- If there are any CCJs, defaults or Bankruptcy flags on your credit file
- If you are making a joint application they will check the same details with your joint applicant
Lenders use all this factors along with their risk modelling to decide what rate they will offer you.Applying for a secured loan(e.g mortgages)will place much emphasis on the asset as it is collateral while unsecured loans(e.g credit cards) will look more into your credit file.
Knowing what affects your eligibility for products outside your credit score are also important and It is worth following our(or a) best practice list when considering a Mortgage, credit card or any financial product so to ensure you do the right things months before you make your credit application as this will put you in the best position to be accepted.
Is your credit score good enough?
Now you know that Lenders will check your credit score whenever you apply for a financial product. So just what is a good credit score?
The first thing we do know is that the higher the credit score, the higher your chances of being approved for most financial products. Different Lenders use different credit scoring criteria that now take more into account other than just your credit score. Some lenders might just use your credit score while others will dig deeper into your credit file by viewing your credit history.
If you have things such as missed payments or County court judgements then a lender might decide it is not willing to lend to you. Each lender has its own credit scoring criteria so It is hard to say what exact credit score you will need for particular financial products as Lender’s credit score criteria are tightly guarded secrets but what we can say is you should never apply blindly for credit products but rather apply using an eligibility checker. This will show you your likelihood for being accepted for the credit product before you apply.
But for a more in-depth look, these are the general credit scoring benchmarks for the 3 credit bureaus in the UK. Each credit reference agency has a different scoring mechanism and a different maximum or minimum score.
|Very poor: 0-279||Very poor: 0-560||Very poor: 1|
|Poor: 280-379||Poor: 561-720||Poor: 2|
|Fair: 380-419||Fair: 721-880||Fair: 3|
|Good: 420-465||Good: 881-960||Good: 4|
|Excellent: 466-700||Excellent: 961-999||Excellent: 5|
What is in your credit score?
Some of the data points in your credit score may include:
Your address history
Your credit accounts and their payment history
Your credit utilisation
Public records such as County Court judgements, electoral role registers, Individual voluntary agreements, Bankruptcies
Types of Credit
It is worth noting that not all these factors are displayed back to you in your credit report but might be used to make up your credit score.
The data points that are definitely not included in your credit report include:
Your student loan repayments
If you check your credit score
Council tax payments
Savings accounts( Only your current accounts are shown)
What affects your credit score?
Little or no financial history: You might call it unfair but your credit score will usually be low or average once it is first generated as there will be no history of how you cope with financial products as you have never had any or have had such little history that it isn’t credible enough to warrant a higher score. You will need some credit accounts before your score will begin to move up as this accounts allows the credit bureaus to see how you manage credit. If you pay on time and how much credit you use(Your credit utilization).
Multiple recent Hard credit applications: It’s always a bad idea to apply for too many credit applications in a short space of time…especially if you keep getting rejected as the rejection is recorded on your file as well. Making too many applications in a short time is regarded as a desperate behavior by the credit referencing agency and so indicates some sort of financial trouble which in turn indicates bad financial planning. This, of course, might not be the exact case in every situation but credit references register it this way as a general rule of thumb. This is only relevant to Hard credit searches which lenders can see on your credit file. Soft credit searches cannot be seen by anyone but you.
Late or missed payments: Missing credit repayments or making them late will affect your credit file. Making the minimum required payments to your credit card will also affect your credit score as the credit referencing agency will view you as just being able to make the minimum payment and not the full balance owed. Making your payments on time will improve your credit score.
Bankruptcy, CCJ or IVAs: Any of this will certainly push your credit score low and even if they aren’t low enough so lenders stay away from you they will stay on your file for 6 years meaning you will almost certainly never get good rates over that time frame.
Too many registered addresses: Having too many registered addresses might indicate that you are not settled or indicate a more fraudulent behaviour.
High Credit utilization: Using too much of your total available credit will make you look desperate and dependant on credit. It is advised that you use less than 30% of the total credit available to you on each account. E.g Overdrafts or credit cards.Paying down your credit balances will reduce your credit utilization and improve your credit score.
Too many accounts: Having too many accounts may negatively affect your credit score. However if you have too many zero balance accounts this is seen as more positive.Opening too many credit accounts in a short period may also affect your credit score as it may leave too many hard credit searches on your credit file and indicate that you are taking on too much debt.
The age of your credit accounts: Accounts which have been open for longer will contribute towards your credit score as you have a longer credit history.Closing credit accounts may reduce your credit score as it reduces the amount of credit available to you and may increase your credit utilization whilst also reducing your credit history if the account you closed happened to be your oldest.
Types of Credit: They types of credit you have available to you also plays a factor in your credit score. If you only use credit cards or payday loans this might factor negatively into your score.Bad behavior such as excessive gambling, excessive use of credit such as payday loans can also affect your credit file and destroy your chances of getting credit. So do try and stay away or utilise this in a stable manner.
Public records: Public records could hold negative or positive information about you such as how long you have been registered on the electoral roll or if you are bankrupt, have a county court judgement against you or if you have ever entered into an Individual voluntary agreement.
Be sure to check your credit file to ensure the information is correct and close any unused credit accounts, as having a large overall credit limit may be viewed negatively by lenders.
You should check for E.g your addresses, your full name and the credit products you have currently or in the past.You should check with all 3 credit reference agencies: Equifax, Experian and Callcredit. If you spot any mistake in your credit file, you must ask for a correction from the credit agency.
The Consumer Credit Act gives you the right to obtain your full statutory credit report at any time at a cost of £2 per report, so the total outlay should be no more than £6.
If you are a prospective first-time buyer currently renting then it is worth reading about and registering for the rental exchange scheme. The scheme essentially records your rental payment data. This means whenever you pay your rent on time this will affect your credit score and push it upwards.
How many credit applications should you make?
Applying for too much credit in a short period of time will affect your credit score as the more rejections you get the worse it looks on your credit file. Most lenders also have black box criterias that pick up on the rejections on your credit file and instantly refuse you credit. This is why the general rule if thumb is to not apply blindly for any credit within 3 months of a major credit application such as a mortgage.
Everytime you make a credit application the lender will do a credit search. These are hard searches and leave footprints on your credit file. The more you have of this searches in a short period of time, the more your credit score will go down.
These searches can also be seen by other lenders who want to offer you credit. Soft searches on the other hand don't leave footprints which are visible to anyone but you on your credit file.
So why is applying for too much credit bad?
It is bad because you appear desperate to lenders and desperacy indicates you are not thinking properly(or are in financial trouble) and could potentially end up not repaying your loan. Whilst this is a bad thing for majority of lenders, there are some lenders that will look to profit from your desperacy and expect you to miss your repayments and default on your loan. This will ofcourse cost you through fees and interest rate charges not to mention damage your credit score when they record a default on it.
So how many credit applications is too many?
Well no one really knows as this is specific to each lender and we don't have access to that information as it is proprietary to the specific lender. The best rule of thumb is to make 1 credit application within 3 months.
Negative information such as missed payments, CCJs, bankruptcy etc will stay on your credit record for 6 years whilst other things such as credit searches only stay a year but lenders are really usually more interested in activities between 6 and 24 months as this gives a better indication of your present behaviour.
So when is the best time to apply for a loan or credit?
A good financial wellbeing platform will let you know instantly what offers you are eligible for but the general rule of thumb if you are applying without any technology beforehand would be to have a stable job, regular income, not more than 2 debts on your credit file and a history of regular payments towards your debts.
How to build a credit score (from scratch)
Having a healthy credit score will greatly improve your financial wellbeing. There are so many different needs for a good credit score. If you are renting for example most landlords will run a credit check and if you don't have an acceptable score they will refuse to rent the property to you as they fear you will default or be late on the rent.
So your credit score is very important indeed but how do you get a good score and keep it?
1)Register to vote(Get on the electoral roll):
The easiest way to build a credit score is to register to vote as this data is recorded on the public register which the credit bureaus check and include in your credit file. This is the first way to prove your identity and by far the easiest. In the future when you apply for credit or a credit check is done, this will be the basis of their verification method for you and helps make you seem more creditworthy. You should check with your local council here if your are already on the electoral roll and if not you can register to vote here. If you are not eligible to vote in the UK you will not be able to get on the electoral roll. In this case you can get a similar benefit by submitting a document to either Experian, Equifax or callcredit proving your identity and address. You can then ask them in writing to confirm that they have verified your identity on your credit file.
2) Get a secured credit card:
Credit cards can be used to build credit as they allow you to show you can make credit repayments, they add to your available credit which will improve your score and they allow you to show a low credit utilization which will increase your credit score.Getting approved for most credit cards will be difficult if you have a low credit score but a secured credit card can help you overcome this. Secured credit cards will approve you if you pay a deposit. This deposit is usually your credit limit or a percentage of your credit limit. Secured credit cards aren't very common in the Uk. Capitalone was known to offer one and you should contact them to see if this is still available.Secured credit cards will have low credit limits and high APRs.
3) Get a credit Builder Card(student credit card or store credit card):
Credit Builder cards are similar to secured credit cards as they are targeted towards people with low or no credit scores.Credit Builder cards do not require security deposits but as with secured credit cards they will have low credit limits and high APR. A student credit card will likely be available on the same terms as a credit builder card. The best place to get this might be from your bank as they will be more likely to approve you for this. Store credit cards are usually easy to get approved for too.There are also credit builder prepaid cards which charge a monthly fee which is then recorded on your credit file as repaying a debt. This helps you build your credit score.
4) Get a credit Builder loan:
Credit Builder loans just as they sound help you build credit. The idea is you take out a loan but rather than receiving the loan funds these are deposited in an account(usually to earn interest) and you make repayments to the loan provider every month. As you make these loan repayments on time your credit file records this and your score improves. At the end of the loan term you get all your loan repayments and whatever interest you have gained.
- Get a cosigner for a credit card or loan: If you can't get a credit builder loan, credit builder card or secured credit card then your next bet will be to get yourself a cosigner on a credit card or loan. You should really only do this if you are likely to repay your credit cards or loans on time and in full every month. If you make this repayments on time your credit score will rise and payments will be registered on your credit file. Getting a cosigner on a credit card or loan creates a financial relationship between yourselves. This means any negative behaviour from them might affect your credit score negatively and vice versa. A cosigner essentially allows you to qualify for credit and in some cases cheaper credit. A cosigner will also be legally responsible for any debt owed on the account if you default.
6) Become an authorised user on someones credit card:
The difference between authorised users and cosigners isn't that much.Becoming an authorised user on someone else's credit card will help you build credit if the main card holder makes all their repayments in full and on time each month as well as keeping their credit balance low. some credit bureaus might not take you into account and may not collect this data. You should contact the credit bureaus asking them to report this data.. Becoming an authorised user does not give you any liability, so if the main card holder defaults you won't be held liable but it does affect your credit score if the account is mismanaged or goes into default.
7)Open a Bank account:
The simplest thing you can do to establish credit is open a bank account. By opening a bank account you open an account which gets reported to the credit bureaus as an account on your credit report. The longer you have this account open for the longer you will have a credit history. It usually takes 3 years from you opening an account which gets reported on your credit file before you will have any credit history which can be seen. Opening a bank account also allows you to have an account on your credit file with a verified home address. This means it will be easier for you to access credit products in the future. A bank account might also be the easiest way to a credit card as banks are more willing to offer credit cards to account holders as they can view your account history and see how credit worthy you are even if you have a low credit score.
8) Ask your bank for a small overdraft facility:
To Build credit you need credit. You then need to show good behaviour when you have access to this credit. By asking your bank to give you an overdraft facility you will have a credit account open on your credit file which boosts your credit score. You will also have the ability to use your available credit, sticking to the 30% maximum credit utilization golden rule per credit account and thereby show good credit behaviour which should boost your credit score even further. Always repay your overdraft as soon as you can to avoid any fees.
9) Get a Household Utility in your name:
Utility accounts are now being reported on your credit file. This means that your payment history on your gas, electric and telephone service will affect your credit score. By getting yourself named as the account holder on this services you can establish and boost your credit score if your bills are paid on time and there are no balances or defaults on the account. If you live in shared accommodations be sure to avoid any disputes and get payment for utilities well in advance so as to avoid any of your house mates holding you hostage and ruining your credit file.
Do you live with your parents? Ask them to put your name, date of birth and address on the utility bill. This will open a new account on your credit file and ensure you begin to get credited for the regular payments being made on the account. If payments are missed on the account this could negatively affect your credit score so you must ensure payments are not missed. You can also simply get a cheap phone on contract. A £5/month contract will be achievable with little or no credit file as the risk of default is very low and making regular repayments to your phone will boost your credit file. You should avoid applying for more expensive phones with no credit file or score as this could damage your credit score even further ..even though you don't have one.
10) Report your rental payment to the credit bureau:
If you currently paid rent or paid rent within the last 3 years you will be able to report your rental payments to the credit bureau and this will be an account on your credit file showing your payment history.Paying on time will ofcourse increase your credit score whilst missed payments will reduce your credit score. The scheme is known as the rental exchange scheme and is currently only being offered via Experian.
**How does rent reporting work?
At this point, out of the 3 credit bureaus in the UK, only one( Experian) is offering this solution. Experian collects rental performance data from credit reporting agencies such as Huuti. This data is then stored on your Experian credit report which you can view at any time.
To report your rent you simply have to sign up and let us know which date your rental payment is sent to your landlord. We verify this through your banking transactions and send this data to Experian on the 1st of Each month.
Rent reporting is a Debt free way to build credit?
Yes. Unlike traditional methods credit is built such as loan or mortgage repayments, paying rent does not involve getting a loan and showing your ability to repay your loan, which then gets recorded on your credit file. Rent payments, just as mortgage payments or utility payments are financial commitments and your payment performance history indicates your ability to adhere to your commitments.
Unlike loans, credit cards etc rent reporting requires you to opt-in for your rent performance data to be recorded and reported.Reporting your rent will allow you to build your credit history and credit score.You can of course always opt out of reporting your rental performance data to the credit bureaus. In the future this might become a legal requirement to report your rental performance data.
Can anyone report rent payments?
In practice, to report rent you need to be a tenant and your landlord cannot be your close family members or friends.Your landlord does not need to be signed up for you to report your rent payments.
How does rent reporting help?
Rent reporting will help you have a more indepth credit history and boost your credit score if you make on time payments and are not behind on your rent. This will allow you to qualify for better interest rates on loans or credit cards which will save you a lot of money in interest rate charges. At this point in time in the UK, Only Experian collects and stores rental data on a tenants credit file. This means that the lender you take your loan out will need to be using your experian credit file for you to see much benefit from rent reporting at the moment. This will undoubtedly change in the future as the remaining two credit bureaus( Callcredit and Equifax) begin to collect and store rental payment performance data on tenants credit files.
At the moment there are five core sections that affect how your credit score is generated. These are your payment performance history on loan products, credit cards etc, your debt utilization on your overdraft or credit cards, Hard searches by lenders, how long you have had each account on your credit file open for and the types of accounts you have. Your payment performance history usually represents a significant factor with a weighting of at least 35% of how your score is generated. It isn't very clear how rent payment will be ranked but we suspect is it being taken into account as payment performance history and this should be the very reason every tenant reports their rent payment.
Younger tenants have much to benefit from rent reporting as they usually have thin credit files meaning they could graduate from university without a strong enough score or in depth credit history to attain credit products such as credit cards.
For those who don't even have a credit file, this opens the door for you to build up your scores and file gradually.
Rent is usually the largest monthly expenditure for most tenants. Why not get credit for it?
11)Increase your available credit limit:
Increasing your credit limit will reflect on your credit file and push your credit score upwards as it shows lenders are willing to trust you with more money as well as reducing your current credit utilization( how much you spend in ration to how much credit you have available, the golden rule is a maximum of 30%). You can ask your current card provider to increase your credit limit or let you know if you will be eligible for a credit limit. Also ask if they intend to run a hard credit search on you and do not consent to this unless they will preapprove you for a credit limit increase.
12) Open a new credit card account:
Opening a new credit account will be your next option if your current credit card provider will not increase your credit limit. You essentially accomplish the same things as your available credit limit increases. You must repay your balances on your credit card account every month and avoid using over 30% of your available credit.
13) Reduce your credit utilization:
Your credit utilization is one of the factors that affects your credit score. The golden rule is to use no more than 30% of your available credit. If you are currently using above this then reducing your credit utilization below this limit will improve your credit score.
14) Pay down your credit card balance & debts:
Credit card balances and credit debts are recorded on your credit file. This balances have a negative impact on your score as well as costing you in interest rate charges and fees. Paying down your credit card balances, loan balances or any default you have on utility and credit accounts will boost your credit score.
16) Pay your credit card balance in full each month:
Making only the minimum payment on your credit card means you have an outstanding balance which is recorded on your credit file.This negatively influences your credit file. Paying your credit balance on time full in each month will improve your credit score.
16) Never miss a monthly credit repayment:
Missing credit repayments negatively impacts your credit score. Keeping up with your monthly credit repayments will see your credit score increase gradually.
18) Don't close Credit accounts:
Closing credit accounts can negatively impact your credit score as this reduces the number of accounts with a credit history. This is especially worse if the credit account you clode is one with a long history.The account will no longer be open and will therefore not count towards majority of your credit score.Unused credit accounts which don't have long histories can be closed as they do not add to your credit score.Having access to too much unused credit may be seen as negative.
18) Have a good mix of accounts:
Mix things up a little by having a varying degree of accounts on your credit file.Like your partner credit bureaus like to see you mix things up a little bit. By this, we mean that a proportion of your credit score is ranked by how diverse the different types of credit you have been utilizing. Examples include:
Revolving accounts (i.e. credit cards, store cards)
Installment accounts (i.e. home equity line of credit, auto loans)
Open accounts (utility accounts)
Increase your variety and your credit score will increase.
19) Check your credit file for errors:
Credit files have been known to contain errors. Some simple error could include incorrect credit accounts reported on your credit file(if these account has a negative payment history then it will push your credit score downwards). Accounts not being reported on your credit file, misspelled name, adress or incorrect age.
20) Remove negative financial links:
You should check your credit file for financial links that you don't recognise. Some financial links can reduce your credit file as this might mean your credit score is going down due to someone else's bad credit behaviour.Any financial links which seem out of the blue can be removed from your credit file.Financial links can be generated by just sharing apartments with someone else et. You should ask the credit bureaus to correct this.As you remove this negative financial links your credit score should move upwards.
21) Stop making Blind applications:
Making applications for utility or credit can reduce your credit score. This is because everytime a utility or credit provider is about to open a new account they will do a hard credit search. You should only apply for credit or utility which you are approved for. If you make multiple credit applications then multiple hard credit searches will be done on your credit file. This means your credit score will go lower as the credit bureau will view too many credit applications as desperate. If you stop making blind credit applications then your credit score will likely go up. You should always use an eligibility checker to see if you will be approved for credit or utility accounts before you apply.These checks are done with soft credit searches which only you can see.
22) Check the address on your old accounts:
Any active accounts on your credit file should display your correct address. You can check the addresses on your accounts by viewing your credit file. Make sure all active accounts list your current address. This may increase your current credit score.
23) Build credit by monitoring your credit file:
To build credit you need to constantly monitor the changes in your credit file.You cannot be half in and half out.
And finally some best practices to ensure your credit score doesn't get any lower
Avoid withdrawing cash with your credit card: Not only does this cost you in charges it creates the impression you are desperate and may negatively affect your credit file
Avoid payday loans: Payday loans are viewed as desperate and most lenders will not lend to someone who has recently taken out a payday loan.
Before we go our last piece of advice. See if any companies giving you a negative mark on your score are willing to forgive you and make an amendment. This can be a long shot, however some companies can actually be quite forgiving and willing to work out a reasonable compromise with you. Because at the end of the day they’re people too and have a credit score that also affects them.
Once you’ve improved your score the key thing is to do no harm! Don’t wreck all of your hard work before applying for anything. The next step for you is to check out if it makes sense to refinance your existing loans to reduce your current outgoings and improve your disposable income. Chances are you could save money on a cheaper interest rate.
You should also only borrow what you can afford. The easiest way to get into debt is to borrow more than you can afford to pay back.Debt can then lead to negative marks on your credit file such as Individual voluntary arrangements, county court judgements or bankruptcies.
ALways check your credit file after a rejection. The lender will usually tell you what credit provider they used. Avoid applying for more credit applications until you are very sure of why your credit application was refused. Lenders and credit bureaus may agree to remove the searches from your credit file if you have made too many but this is very hard.
Avoid credit repair companies like the plague.
You can negotiate defaults recorded on your credit file if you are willing to settle any debts on the account. The lender might erase this default if you come to such an agreement.If a default is recorded on your account in error you should notify the lender or account provider and ask them to remove it.. If they fail to take any action you can add a notice of correction on the account explaining the issue briefly. You can also report the lender or account provider to the relevant ombudsman.If it is a bank, insurance companies or lender then you can report this to the financial ombudsman
If your account is with an energy company then you can report to the Energy Ombudsman. Similarly,[ the Communications Ombudsman will help if it's a broadband or mobile company. Both can order companies to remove information from your credit report.
Taking the above steps should help you build credit and improve your financial wellbeing.