When you apply for credit – such as a credit card, loan or mortgage – the lender uses a credit score to decide whether to lend you the money.
If the lender turns you down, it’s likely because they’ve used your credit score to determine that you might not be able to afford the debt that comes with borrowing.
Fortunately, though, there are steps you can take to improve your credit score and make yourself more creditworthy. Read on to find out more.
Credit reference agencies have said that taking a mortgage payment holiday during the coronavirus outbreak will not affect your credit score.
How your credit score is worked out
You don’t have just one credit score. Every lender has their own way of working out credit scores, and will calculate yours based on:
- your credit report
- your credit application
- their records, if you’re a former customer and they still hold your data
They might also have certain lending criteria that they need to abide by.
What this means is that even if one lender rejects your application for credit, it doesn’t necessarily mean other lenders will too.
Credit reference agencies
The credit reference agencies (CRAs) – Experian, TransUnion and Equifax are the three main ones in the UK – are the companies that hold your credit report. They too have their methods for working out your credit score.
Not only do they use their own numerical scales, they also group scores into categories such as excellent, good, fair, poor and very poor.
The three CRAs consider the following to be excellent, good and fair credit scores.
- Experian: 961–999 (Excellent), 881–960 (Good), 721–880 (Fair)
- TransUnion: 628–710 (Excellent), 604–627 (Good), 566–603 (Fair)
- Equifax: 466–700 (Excellent), 420–465 (Good), 380–419 (Fair)
Why it helps to have a good credit score
Lenders use your credit score to assess the risk in lending you money. If your score indicates you might not be able to afford the repayments, they’re more likely to turn you down.
However, lenders will also use your score to determine what interest rates and/or credit limit to offer you. This means you might:
- get a higher rate than advertised
- receive a lower credit limit than you expected
- miss out on introductory promotional rates
For example, a loan might be advertised with an annual percentage rate (APR) of 7.5%. But your credit score might be such that the lender can only offer you the loan at a higher rate of 30%.
For this reason, it’s really important that you do what you can to keep your credit score as high as possible. There are some tips for how to do this below.
6 ways to improve your credit score
If your credit score is too low, here are six things you could do to improve it:
1. Register to vote
Lenders use the electoral register to confirm you’re living at the address given on your application. If your details aren’t on the register, it could make it harder for you to get credit.
You can register to vote at the Government’s website.
2. Check your credit report for inaccuracies
Mistakes can happen, which is why it pays to check your credit report each year to make sure it’s an accurate record of you and your financial history.
Even the slightest error could be the difference between whether or not a lender decides to give you credit. If you find a mistake in your credit report, contact the company responsible and have them correct it.
3. Try not to miss payments
Lenders want to be sure that you’ll pay what you owe, in full and on time. Missing one or two payments might not seem significant, but can actually have a severe impact on your ability to get credit.
Demonstrating that you can keep to a repayment schedule and manage your financial obligations responsibly can help show a lender that you’re creditworthy.
4. Break off any financial associations that might harm your record
Opening a bank account with another person, or taking out credit with them (such as a joint credit card or a joint loan), creates a financial association between the two of you.
When you apply for credit in the future, the lender will check both your credit report and the report of the person with whom you have this association. If that person has a poor credit score, the lender might see this as hampering your ability to make repayments.
With this in mind, consider ending any financial associations with people you no longer have a relationship with, as their financial circumstances can still affect yours. To do this, you can contact the credit reference agencies and ask them to amend their records.
5. Use as little of your existing credit as you can
When you apply for credit, the lender sets you a credit limit. Although you’re free to use the full amount of credit available, the lender will look upon you more favourably – and increase your credit score – if you use no more than half of it, as this demonstrates that you can manage your credit responsibly.
If you’ve used your available credit but want to apply for more, it helps to pay off any amounts you owe, before you make your application. A lender is more likely to lend again if you have little to no debt.
6. Avoid making lots of applications at one time
Every time you apply for credit, it’s recorded on your credit report. Making a number of applications in a short space of time could be a sign that you have financial problems – and possibly put a lender off giving you credit.
If you’ve applied for credit but been turned down, try to leave some time before you apply again. Instead, consider:
- using comparison websites to carry out “soft searches” (searches that tell you whether you’d be accepted for a credit product, but without being recorded on your file)
- contacting lenders to find out what they’d be prepared to lend you
What’s included in your credit report
Typically, your credit report will contain the following information:
- Your name, date of birth and current and previous addresses
- Your credit balance – how much you currently owe
- Recent searches of your credit report
- Your financial associations with other people
- Whether you’re on the electoral register
- Any payments you’ve missed or been late with
- Public records – any court judgments, debt relief orders, bankruptcies, individual voluntary arrangements or other similar records
- Whether you’ve been declared bankrupt
It won’t include any of the following:
- Your salary
- Student loans
- Council tax arrears
- Parking or driving fines
As lenders are most concerned with your current financial situation, the information on your record that’s most recent will likely have the greater impact on any decision to offer you credit.
The CRAs update your credit report every month and hold the data within it for six years.
How to check your credit score
The UK’s three main credit reference agencies, Experian, TransUnion and Equifax, each have websites on which you can check your credit score and see your credit report.
Use the following links to visit their websites:
Disclaimer: While we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.