A Guide To Improving Your Credit Score

In a post earlier this month, I talked about how I have been making my rented apartment a home while saving to buy my first property.  Its so important to know your money when you start earning and setting yourself financial goals and so I’ve started up a savings account and I put away as much as I can each month to help me towards my goal.  Although it isn’t a lot, every month I get one step closer to achieving that goal and one step further away from where I am now.  Progress not perfection.

Even though I’m a long way off buying a property, its important to me that the place I’m living in now feels like home because its going to be my home for the foreseeable future while I save and I absolutely love it here.  I just wish I could buy it!  It’s also important to me that I get my finances in order now so that by the time I do save up enough money to buy, I’m good to go.

There’s three main things that I’m doing to help myself for the future:

• SAVING: I don’t just mean saving money into an account for my house deposit but saving money on my day to day spending by cutting back on bills, shopping, lifestyle expenses, etc.  Reducing my outgoings will help me when I go for my first time buyer mortgage.
• EARNING: Working not harder because in all honesty, I give everything my all and rarely stop but more importantly, I’m working smarter.
• FINANCES: Keeping a close eye on the running of my bank accounts, paying off debts and strengthening my credit file to put me in the best position to secure a mortgage.

While I know a little bit about credit scores as I worked in banking for quite a few years, however I don’t profess to be an expert by any means and I’m certainly not qualified to give advice but I thought I’d share some thoughts and what I’m doing to help myself in this post.

Money, finances, credit scores, they’re all things that people from all walks of life worry about from time to time, or all of the time, which is completely understandable.  The trouble is, when you’re at school, you learn about the Tudors and Pythagoras Theorem yet you don’t learn about how to run a bank account, the difference between a standing order and a direct debit or how to fill out a tax return.  Maybe kids do now, I don’t know but they certainly didn’t teach those things when I was in school.  It goes without saying though, all of these things are very important.

Your credit score basically paints a picture of how creditworthy you are.  Lenders will use it to determine what kind of a borrower you are and how likely you are to pay back your repayments when they’re due.  Generally, the higher the credit score, the lower the deemed risk however some lenders will also look at profitability for them.  For example Person A has £1000 on a credit card and always makes the minimum payment each month vs. Person B who spends £1000 on their credit card each month but clears the balance in full.  Different lenders have different criteria but what is for certain is that having a good credit score or rating, enables you to access more financial products and services such as credit cards, loans, mortgages and even mobile phone contracts, all of which can have a huge impact on your lifestyle.

The information on your credit file also helps to determine not only whether you are able to borrow money but also how much you can borrow and the amount of interest you pay.  While you might not be looking to take out any kind of financial services at the moment, you never know what the future may hold so its a good idea to always be looking to maintain or improve your credit score.  I’m focusing on improving mine because I want to be in the strongest possible position when it comes to securing a mortgage in the future not to mention that’ll I’ll probably need to buy a sofa on a 0% finance deal at some point when I’ve bought my house so again, strengthening my credit file is the best possible way to help me with that.

Fortunately, there are lots of ways that I can improve my credit score and without giving advice, there are plenty of ways that you can to which can help to put yourself in a good position so that you will be looked on favourably when the time comes to borrow money.  Even if you’re someone that doesn’t like borrowing money, you never know what the future might hold so in today’s post, I though I’d list some of the ways that you can improve your credit score.

CHECK YOUR SCORE
It’s impossible to know where the improvements that need to be made are if you haven’t seen your credit file so the first thing that you need to do is to check your credit rating.  In the UK, you can check it for free through one of the three main credit referencing agencies; Equifax, Experian and Callcredit.  Different lenders use different a different credit reference agency but your credit report should say the same thing there or there abouts.  Be careful though as some of these free credit checks are only free for the first 30 days, after which you’ll be charged a fee so make sure you cancel before the end of that period.

I am actually signed up to a lesser known company called Noddle which does have some payment options but on the whole, a credit report with them is free for life.    I actually signed up to them back in 2015 and I’ve been with them ever since.  They email you each month to say that you file has been updated and I find that its a great way to keep a check on your credit file.  Once you have yours, check your score monthly if you’re looking to improve it and at least every six months if you’re wanting to maintain your rating as this will also enable you to understand your current situation in more depth and potentially spot any inaccuracies and fraudulent activity.

UNDERSTAND THE REPORT

When you have your credit file, its important that you actually understand what it is telling you.  I’ve found that over the years, these websites have become much more user friendly with far less jargon but if in doubt, there’s always good old Google.

Each credit reference agency will have some different information on your file, but generally they will include your name, address, date of birth, credit applications, financial links to others, late/missed payments, how much you owe to lenders, CCJs, information on if you have been declared bankrupt and things like that.  Many will also tell you which financial services you would be likely to be accepted for based on your rating should you apply, for example a loan with X company or a credit card with X.

The site will also tell you where you rank on a scale of poor to fair to good.  For example, a good credit score with Callcredit is 4 out of 5, over 420 is considered good with Equifax and over 880 with Experian.

As I’ve done my research over the years, I’ve picked up tips on what you could do to improve the rating further and some of these credit reference agents actually give tips on their site, linked to your credit file too.

CHECK FOR MISTAKES
Something thats really important to do is to check to see if there are any mistakes on your credit file.  This could be if a missed payment that was the fault of the company and they haven’t corrected your file, or it could be a loan you had that has now been finished and fully paid but is still showing as being open or it could be if you have experienced fraudulent activity that you may not have known about.  The open credit lines on your file plus the search footprints will show which companies you have financial products with and who have searched your file and left a footprint.  If you don’t recognise something, you must immediately flag it as it could be fraud.

Sometimes there might be a mistake on your file that’s due to a small inaccuracy perhaps from years ago but it can have a huge impact on your credit score and your future chances of securing a mortgage so these issues do need to be rectified as soon as possible.

GET ON THE ELECTORAL ROLL

One of the quickest and easiest ways to boost your rating is to register on the electoral roll, which you can do easily either online (by registering to vote) or by post.

You may find it difficult to get credit if you are not registered, so do this one as soon as possible. This is because credit reference agencies will easily be able to verify your identity and where you live which can make you appear more stable to potential lenders.

PAY BILLS ON TIME
It goes without saying, that paying your bills on time every month helps your credit file massively.  You need to show that you are good with your money and capable of paying it back on time, so always pay your bills on time, and the sooner, the better.

If you’re experiencing financial difficulty, that’s a different matter entirely but if you do have enough money to cover your outgoings each money but you’re just not doing it due to poor money management then that’s something that you can solve.

You need to find what works for you but if it helps, I’ll explain how I run my current accounts.

I have two current accounts with debit cards and on my online banking, I have one labelled as Bills and the other Spends.  Every month when I get paid, I transfer the money over into my spending account and then move the exact amount of money that I need for my bills over to my bills account.  Although I don’t use it, the bills account is the one that I have my overdraft facility on so that if ever there was an emergency, something comes out on a date I’m not expecting, I have fraud on my account, a payment comes to me late, etc I would still be able to cover my bills for the month as a short term solution.

I only spend the money that is in my spends account so if I haven’t got it, I can’t spend it.  I leave the bank card for my bills account hidden away somewhere that I can’t touch it and I forget that I even have it!

Another thing that really helped me was setting up all of my payments to come out on a direct debit or a standing order, that way I’m not worrying about whether or not I’ll remember to pay my rent and since I have them all scheduled to go out after I’ve been paid, I know quite early on how much money I have to play with for the month.  Its not quite as straight forward as that with me being self employed and waiting on invoices etc but generally speaking, that’s how I run my two main accounts.  Dividing my finances really helped me loads, its something that I’ve done since my early twenties and really felt the benefit.

USE A CREDIT CARD LITTLE & OFTEN

Now this is a funny one because I know so many people who are against credit cards but when used responsibly, they can be absolutely fantastic because they offer higher levels of fraud protection than a debit card, cheque or cash, they often come with benefits such as air miles or cash back and if you get a good deal, they can be used to spread the cost of higher priced items if your credit limit allows.

However a credit card can also be a way to build up your credit score because, if used responsibly, it can make you appear more attractive to lenders as it shows that you are reliable and capable of paying back what you owe. Therefore, if you make small, regular purchases with your credit card and pay it off every month, this can help you to increase your credit rating.

Never ever treat a credit card as free money, don’t spend on it what you know you can’t afford to pay back and if you can’t pay it off in full at the end of the month, don’t use it on anything that’s unnecessary otherwise those shoes that seem like a great bargain in the sale will end up costing you far more than they’re worth by the time you’ve finished paying it off!

When I can, I like to pay for things on my credit card as I get cash back and then I go straight onto my online banking and transfer the exact amount over onto my credit card so I’m never owing any money at the end of the month but I’m still helping to build my credit.

KEEP CREDIT UTILISATION LOW

Following on from this, I’ve always been told that its a good idea to avoid using too much of the credit that’s available to you so that you can show that you are capable of managing your credit. A good rule of thumb is to avoid using more than 30% of your limit.

ELIMINATE DEBT BEFORE APPLYING

Before applying for any type of new credit, it is a smart move to eliminate any pre-existing debt if possible. A lender may hesitate to lend money if you already owe money elsewhere, plus other debt may reduce your affordability, so do what you can to reduce or eliminate debt before making an application, especially if its for something like a mortgage or loan.

There is a difference between the way that banks will assess your affordability for a short term borrowing product such as a loan or credit card compared with a long term loan like a mortgage or a secured loan which is generally over a far longer time period and usually secured against a property however your affordability and how much you have going out vs coming in will always be looked at.  It is down to the bank as a responsible lender to make sure that you can pay back the money that you owe and that by giving you the lending product, they’re not putting you into financial difficulty.

CLOSE DOWN UNUSED CREDIT LINES
Another idea to help to boost your credit rating could be to close down unused credit lines, such as catalogues, store cards and credit cards, if you’re no longer using them and don’t intend on using them again.  This is because although they might have a 0 balance, you still have an approved credit limit on them and therefore access to that extra money should you need it and if another company were to give you more credit, in the future it could put you into financial difficulty if you then decided to use all of these previously unused sources of credit.

SPACE OUT CREDIT APPLICATIONS

Where possible, if you do make any new applications for credit, try to space them out.  If you were to make lots of credit applications within a short space of time, it can show that you are desperate for credit and not in a good financial state which can negatively impact your credit score.

Since I’m wanting to go for a mortgage in the not too distant future, I’m trying to keep my credit applications to an absolute minimum.

NO CREDIT LOAN
Financial institutions in some countries offer a no credit loan as an option to those looking to increase their credit score, in a similar way to how a credit card can help to build your rating.  They could have a positive impact on your borrowing future if you are able to pay it back in full and on time but missing payments can just as quickly negatively impact it.

No credit loans are designed for those that have a poor credit history as they enable you to borrow money while also helping to rebuild your credit rating by proving yourself to be a reliable borrower.  You can read this blog post I found online as it enables you to learn more about no credit loans and how they could be helpful for those trying to improve their credit score.

REMOVE NEGATIVE LINKS

Many people have joint accounts with spouses, housemates or friends. While this can be helpful in many areas of life, such as paying bills, it could have a negative impact on your own credit rating if the person(s) has a poor score themselves.  This can be avoided by closing down any accounts that you have linking you to this person.

BE WARY OF DEBT CLEARING SCHEMES
Finally, I thI see so many adverts online from companies claiming that they can write off your debt but often these companies are preying on vulnerable people.  These schemes often involve bankruptcy which should never be considered lightly.  Bankruptcy and County Court Judgements (CCJs) stay on your credit file for six years and can have a huge impact on your access to all credit facilities, even down to a debit card and a mobile phone contract.  Ideally, they should be avoided at all costs unless absolutely necessary.

If you find yourself falling into financial difficulty, talk to your creditors first, consult the Citizens Advice Bureau or a debt management charity for help as these are the people more likely to be able to help you without it impacting your credit file negatively.

Having a good credit score is, understandably, incredibly important as it could determine if you are able to borrow money as well as how much.  If you’re wanting to apply for a mortgage like I am then its vital that you have your credit file in check before trying to make an application but you can always book in to see an independent mortgage advisor for advice.

Many people shy away from checking their score but it is best to check on a regular basis and take steps to build a good score, even if you’re not planning on making a credit application anytime soon, as your rating can have a huge impact on your entire life.  From what I’ve researched, there are a number of ways to help you to improve your credit rating and a combination of steps can give your rating a boost and increase your chances of borrowing in the future.

Now I just need a small lottery win and I’ll have my deposit…

Do you check your credit file on a regular basis?  What steps are you taking to improve your credit score?