The UK's credit rating system is central to an array of services such as:
- Bank accounts.
- Personal loans.
- Credit cards.
- Insurance cover.
Over the years, several misconceptions have become conventional wisdom, which in turn have made it difficult for many to improve their credit rating. Perhaps the most significant misconception is that a property can be blacklisted, which is simply untrue. Credit rating agencies do not rank properties they rank people, according to their financial history and other factors.
How Is My Credit Rating Calculated?
Before we consider how you can improve your credit rating, we will look at how credit reference agencies calculate your score, what factors impact it. Credit reference agencies take several factors into account to calculate your credit score, including:
- Date of birth.
- Electoral roll.
- Bank accounts.
- Credit cards.
- Credit arrangements.
- Personal loans.
- Utility company debts.
- Associated parties.
- County Court Judgements.
- Home repossessions.
- Formal debt management arrangements.
- Overdraft facilities.
- Current and previous addresses.
- Evidence of fraudulent activity.
Only when you research what your credit rating consists of does the landscape begin to take shape. Much of the information relates to your use of credit facilities. However, it is worth noting that a lack of access to credit facilities can be detrimental to your credit rating, too.
The information on your credit file is a rolling seven-year reflection of your financial history. When calculating your credit score, credit rating agencies will focus more on recent activity. However, issues such as bankruptcy and debt defaults within the seven-year timeframe will impact your credit score and ability to obtain credit.
The credit rating agencies allocate a particular score to different events on your credit reference file. For example, you would receive a positive score towards your rating if you were on the electoral register. However, if you defaulted on a loan repayment, this would create a negative score. Your credit rating is simply a culmination of the many different ranking factors.
How Do I Improve My Credit Rating?
Many people seem in a rush to improve their credit rating when it is usually a slow and gradual process. The credit rating agencies can detect those who are “playing the system” and trying to improve their credit rating as quickly as possible. There are several actions you can take. We explore some of the most significant factors and how you can address these below.
Check your credit file
Unfortunately, from time to time rogue information can appear on your credit file, which can have a significant impact on your credit rating. There are numerous companies today offering free credit checks which allow you to monitor information on your credit file and correct any irregularities. Regularly checking your credit file can also alert you to incidents of identity theft or attempted fraud.
Pay your bills on time
If you're always struggling to pay your bills on time, you may need to look at the long-term structure of your debt obligations. Different lenders and creditors have their own procedures when reporting "events" to credit rating agencies. If you were one day late with a payment, it is unlikely this would appear on your credit file. Some companies look at “payment cycles”. For example, if you paid your phone bill every 30 days, then a late payment wouldn't appear on your credit file if you paid it before the next payment cycle began.
On occasion, you may apply for joint credit with your spouse, partner or business partner – you might also act as a guarantor for someone. As long as an individual has a direct association with you, their credit rating could impact yours. This is a little-known fact but one which can have a significant impact on your credit rating and ability to raise finance in the future. You need to be careful when applying for joint credit or acting as a guarantor.
The credit rating agencies like to keep their ranking systems under wraps. However, it is a general belief that only joint mortgages, loans, bank accounts and, sometimes, joint utility bills are used to associate individuals. That said, on occasion, a link between individuals may be added where a joint application was made, even if the account was not opened. The basic idea behind the associated individual link is simple. If two people are linked, and one was to struggle financially in the future, they may rely on the other person for financial assistance.
The utilisation rate is a significant factor which is often ignored by many people. Your credit utilisation rate is the percentage of credit used, compared to your credit limit. For example, you may have two credit cards with a combined credit limit of £4000. If your combined balance between the two cards were £1000, this would indicate a 25% utilisation rate. This doesn’t mean you should maintain a balance of 25% of your credit limit, as you would be paying interest, but perhaps see 25% as your real credit limit before it begins to impact your credit rating.
Whether you own or rent a property, it's crucial your name is on the electoral roll. This is a significant factor that influences credit ratings and the ability to obtain credit. If you are not on the electoral roll at your current abode, you should get this changed as soon as possible. Do this by visiting the "register to vote” website.
Do I Need To Bother About My Credit Score In Later Life?
A recent ONS report entitled “Living longer: is age 70 the new age 65?” perfectly illustrates how the UK population is changing. As life expectancy in the UK continues to rise, many people will be looking more closely at their finances in later life. So, there are several reasons why you should continue to monitor your credit rating. You never know when you might need to apply for a personal loan or need a credit card!
You are just as likely to be refused credit if you have a chequered credit history and a low credit rating as somebody with no credit history. When finance companies look at your credit rating, they are looking at how you handle your finances and any issues you may have had. In effect, they will try and predict the potential risk of providing finance. This is why many younger people will struggle to get a loan from the bank before they have any credit history.
It is essential to review your credit file and your finances regularly. For example, there may be occasions where debt consolidation might be useful as a means of converting numerous minimum payments into one affordable monthly payment. Remember, it is better to be proactive than reactive with regards to your finances, especially if you see potential problems ahead. For some people, it can be challenging to maintain their credit rating in later life, let alone battling the impact of rogue information on your file.