Having a favourable credit rating is important because it means you’re likely to get a better deal when you’re looking for a mortgage, a new credit card, a mobile phone contract, and many other transactions that are part of everyday modern life. Your credit score can affect how much you’re allowed to borrow, what rate of interest you’re offered, and whether your application is accepted at all.
What is a credit rating?
A credit rating or score is based on many aspects of your borrowing and repayment behaviours, and it’s used by lenders to decide how risky it might be to offer you credit. Each lender has their own way of working this out.
It’s possible to have a very low credit rating, or poor credit score, as part of this spectrum, but it’s a popular misconception that your name could end up on a ‘credit blacklist’.
You will tend to have a lower credit rating if you’ve overborrowed, had financial problems or mishandled your money in the past. However, it’s also possible to have a low credit rating if you’re the kind of person who saves up for things rather than taking out loans and other borrowing – you simply don’t have enough of a credit history for the companies to work out whether you’re likely to repay the credit or default on it.
So, how do you improve your credit rating?
There are two broad categories of action that you can take to boost your credit rating or score: accentuating the positive, and eliminating the negative. Let’s get the negatives over and done with first…
Eliminate the negative
- Avoid missing any payments on your gas bill, electricity, phone, mortgage, and so on.
- Pay off any outstanding, i.e. late or overdue, payments for loans, credit cards and other credit agreements as soon as possible.
- If you have high levels of borrowing, try to pay a chunk of it off before applying for more credit. This way you won’t look like you’ve overstretched yourself financially – and you won’t look like such a bad risk to a potential lender.
- Avoid getting a CCJ (County Court Judgement) against you for unpaid bills. A CCJ will stay on your credit records for 6 years.
- Break associations with people who have poor credit histories, or avoid taking out joint credit with them.
- If possible, try not to move house too frequently. It can raise issues relating to your identity.
Accentuate the positive
- Put your name on the electoral register (sometimes also called the electoral roll). It helps to authenticate your identity.
- Get a copy of your credit report from companies such as Experian or Equifax, and check it carefully for mistakes. Contact the company immediately if there are any irregularities.
- If you have any old paid off credit cards you don’t use, cancel them. This is because your credit score is partly based on how much you could potentially borrow in total, rather than how much you have borrowed already.
- Apply for new credit one thing at a time, and spread the applications out. Making a lot of applications all at once makes you look like a risky prospect.
- If your score is low because you haven’t borrowed much before, you can build up a credit history by opening up and carefully managing a UK current account, or setting up a Direct Debit payment for a regular bill. There are also ‘credit builder’ credit cards you can make a small purchase on and quickly pay off, but remember that these can charge higher rates of interest.