Having a good credit score is essential for many financial activities, from opening bank accounts and obtaining a mortgage to buying a car. Banks, lenders, and other financial institutions use the UK's credit rating system to assess people's creditworthiness and determine their ability to handle debt responsibly.
A bad credit score can limit your options and make it difficult to get approved for the products you need.
However, having no credit score can be just as bad as having a poor credit score. If you have lived abroad for an extended time, you might be surprised to learn that when you return, your credit score is likely to be non-existent. You may even struggle to obtain a mobile phone contract in the short term, let alone other financial products.
At first, building a good credit score may seem like a daunting task. After all, how do you prove that you are trustworthy with money when you lack a solid track record?
However, there are several strategies that people with poor or non-existent credit scores can employ to start building their credit rating. For example, making on-time payments for credit card bills can help demonstrate your financial responsibility to potential lenders or creditors.
Additionally, keeping track of your credit report and monitoring any negative information can help you spot and resolve any fraudulent activity or missing data.
Developing excellent credit requires time and effort, but it is well worth the investment for anyone who wants to build long-term financial stability. In addition, it gives you access to more types of credit with lower interest rates.
If you want to learn more about the mechanics of your credit score and how it works, you can check out our detailed guide here.
How is my credit rating calculated?
Credit reference agencies use several factors to calculate your credit score. For example, they look at whether you're on the electoral roll, your credit utilisation rate, personal loans, and whether you have a county court judgement or an individual voluntary arrangement (IVA).
One of the most important factors is whether you are on the electoral roll. Lenders use this information for identity checks and to limit fraudulent activity.
Lenders may also look at your credit utilisation rate. This measures how much credit you have available to you compared to how much you're using. A high credit utilisation ratio can indicate to lenders that you struggle to manage your finances, potentially making them less likely to approve any credit applications.
In general, lenders give recent information more weight than older information when calculating your credit score. However, lenders will consider all the information on your credit file to get a holistic picture of your financial history.
How do I improve my credit rating?
Improving your credit rating can be a slow process. Still, with patience and a few key steps, you can make progress towards building a solid credit score.
You need to get on the electoral register and then take other steps like checking your credit file, monitoring your credit utilisation, using credit builder credit cards or balance transfer cards, and paying your bills on time.
It is possible to build a strong credit profile over time.
Get on the electoral register
Getting on the electoral roll is essential for anyone who wants to maintain a good credit score and have access to credit. This is because credit reference agencies use your name and address on the electoral roll as an indicator of creditworthiness, which in turn influences your credit score.
It is an essential piece of the puzzle as it allows credit referencing agencies to confirm your identity. This is important to lenders and financial providers as they can prevent fraud and identity theft by checking your identity.
To ensure that your credit rating stays positive, you should make sure that you register at the current address where you are living.
You can visit the "register to vote" website to get on the electoral roll. This site makes it quick and easy to perform this crucial step in securing your credit future. You enter your details into the system, verify that they are correct, and submit them online.
Check your credit file
Checking your credit file is an essential step in taking control of your credit history and credit score. By regularly accessing your credit report, you can better understand your current credit position and identify areas that may need improvement. You can also use this information to monitor possible inaccuracies or incomplete information, which could hurt your credit rating.
Unfortunately, from time to time, rogue information can appear on your credit file, which can have a significant impact on your credit rating. Checking your credit file could also help you spot identity fraud
All of the UK's credit reference agencies provide free credit checks, giving you access to the information lenders see about you when considering whether to offer you credit.
These agencies collect data from various sources, including electoral roll records, so you should endeavour to correct inconsistencies and errors.
Taking the time to check your credit file can be valuable for maintaining good credit health and ensuring you don't suffer negative consequences later.
How to check your credit file for free
There are three credit reference agencies in the UK - Equifax, Experian and TransUnion. These agencies hold information on you which lenders use to assess your creditworthiness. So it's essential to check your credit file regularly to ensure the information contained is accurate and up-to-date.
You can also sign up for free trials of the credit reporting services offered by the agencies. This will give you access to your credit score and more detailed information on your credit report.
Alternatively, you can choose to pay for a subscription-based credit reporting service. This will give you ongoing access to your credit file and score. Whichever option you choose, it's essential to check your credit file so you can rectify any issues that you spot quickly.
Notice of Correction (NOC)
While you can rectify several issues by checking your credit score, such as personal details and wrongfully logged missed payments, not everything can be removed from your file.
If you missed a repayment and this is logged on your file, you may be able to add a Notice of Correction (NOC). This allows you to explain, in 200 words or less, whether you had an extenuating circumstance for missing the payment.
You can also use NOCs to explain county court judgements (CCJs) or other forms of debt.
While it won't improve your credit score per se, lenders may consider it when they decide whether to offer you a loan, for example.
Pay your bills on time
If you're having trouble paying your bills on time, you may need to consider your budgeting and make tweaks. Missing payments could hurt your credit score. If a lender records a missed payment on your credit file, it could remain there for six years.
Different lenders and creditors have their own procedures for reporting events to credit rating agencies. For example, if you were one day late with a utility bill payment, it is unlikely this would appear on your credit file.
Many lenders look at "payment cycles," such as the monthly cycle for your phone bill or the 30-day cycle for your Netflix subscription. As long as you make your payments in these cycles and avoid being late, any payment issues should not appear on your credit report.
Ultimately, keeping track of your utility bills and other debt obligations is crucial for staying on top of your finances and managing your debt effectively.
Credit-builder credit cards
Credit-builder credit cards can be a vital tool for establishing good credit. These credit cards can show lenders that you are responsible with credit and are capable of paying off loans quickly and efficiently.
To take full advantage of these credit cards, you must pay them off in full each month. If you struggle to manage your finances, consider using a direct debit to pay your debts each month.
Additionally, it is crucial to keep your credit utilisation low to demonstrate your ability to manage credit responsibly.
Despite the great benefits of credit-builder credit cards, you should not treat them as a way to spend more money. Instead, it would help if you used them strategically to build your credit score and improve your financial standing over time. Treat these credit cards as merely a tool to build your score.
How to get a credit-builder credit card
Eligibility checkers like Experian and MoneySuperMarket allow you to view credit builder cards you may be eligible for. Before applying for a card, ensure you have a reasonable chance of getting selected by going through these tools first.
While initially, these companies may only do a soft search that does not affect your credit score, your credit score might take a hit if they perform a hard credit search.
Your credit score will definitely drop if you make multiple applications in a short space of time.
The utilisation rate is an essential factor that many people often overlook. Your credit utilisation rate represents the percentage of credit you use compared to your credit limit. A low credit utilisation rate means you're using 20% to 30% of your available credit.
Of course, the best way to use credit cards to build your score is by paying off the balance in full each month.
But that isn't always possible, and people do fall into financial difficulties. Rather than risking a county court judgement or high overdraft charges, you may opt to use your credit card for a short period, especially if you have a 0% interest rate offer.
How to keep your credit utilisation rate low
But what does a healthy utilisation rate look like in practice? For example, if you had two credit cards with a combined credit limit of £4,000 and a balance of £1,000, your credit utilisation rate would be 25%, which would fall within the acceptable range. However, this does not mean you should aim for a credit utilisation rate of precisely 25% since this would likely lead to excessive interest payments.
But by keeping your credit utilisation rates low, you signal to potential lenders or creditors that you are financially responsible and not overextending yourself. This can help to improve your credit score over time.
Conversely, by using up more of your credit, you may signal to creditors that they can't trust you with higher credit limits or other forms of credit. Using more than 50% of your available credit could affect your credit score adversely.
Deal with debt the right way
Dealing with debt, looming court judgments, and a dwindling current account can make it nigh on impossible to build a credit score. But it is important to remember that you are not alone. In fact, the average total debt per UK household sits at £60,935.
So what options are available to you if you’ve maxed out your credit accounts and need to tackle your debt head-on?
Breathing space is a government-backed scheme designed to give you extra time to figure out the best way to deal with your debts. If you are eligible, you will have 60 days of breathing space where creditors can’t get in contact, pursue action against you, or add interest to your debt.
This may be the time you need to figure out how to deal with your debt effectively. However, if you’re interested in this initiative, you will need to speak to an adviser first.
Debt charities like StepChange can offer free, confidential debt advice and money guidance to help your circumstances. They recommend the best solution for you, ranging from a debt management plan to bankruptcy and will even consider if equity release is an option.
Most of their services are fee-free, which allows people to focus on paying off their debts rather than worrying about paying high fees to insolvency practitioners.
Individual Voluntary Agreements (IVAs)
If you take out an individual voluntary agreement, you enter into a legally binding agreement with your creditors to pay off your debts. This can be useful if you have multiple creditors and high debts, but it comes with certain costs and limitations.
For example, IVAs carry significant fees, so they are not ideal for people on a tight budget. In addition, IVAs preclude you from certain types of employment, such as working in the financial sector or legal industry. Furthermore, IVAs will damage your credit score and make it difficult or impossible to get new lines of credit.
Improving your credit rating
Improving your credit rating is a slow process that requires patience and taking meaningful steps to change your financial situation if necessary.
One of the best ways to improve your credit score is to take a proactive approach. This means regularly checking your credit file and taking steps to address any issues or misinformation that may be dragging down your overall score. Also, being on the electoral register will improve your credit score significantly and show potential lenders that you are a responsible borrower.
Other ways to improve your credit score include paying all of your bills on time, using credit-builder credit cards, and avoiding high utilisation rates. A high utilisation rate means using more than 50% of the credit available to you.
Additionally, dealing with debt in the right way – through debt charities, debt management plans, or individual voluntary agreements (IVAs) – can also help improve your overall creditworthiness over time.
With diligence and persistence, it is possible to improve your credit score and improve your chances of accessing affordable loans and other financial products whenever you need to.