Learn more about the different factors that determine your credit score. This guide will help you improve yours and teach you to avoid things that negatively affect your credit rating.
Introduction
It’s surprising what a difference a mere three-digit number can make, but your credit score will be a determining factor in whether or not you are able to do things like take out a loan or qualify for a mortgage, and how much interest you’ll pay on any loans you are accepted for.
Financial institutions will base their risk evaluations on your credit score before deciding whether or not to lend you money or extend your credit, so it’s important to try to maintain a good credit score or if yours is currently not looking so great, learn how you can improve it.
This guide to improving your credit score will help you by explaining how your credit score is calculated and the most common ways to raise your score, as well as things that lower it so that you can lend responsibly and qualify for lower interest rates on any money you borrow.
Without further ado, let’s get into it!
Table of contents
What Is A Credit Score?
Written down, a credit score is simply a number between 300 and 850, but it has a greater meaning behind it that affects how you will be perceived by financial institutions.
The higher your credit score, the more attractive you are as a potential lender.
A credit score of below 640, for example, would mean lenders see you as less reliable and will be less likely to lend you money or will charge you higher interest rates if they do. This is to compensate for the extra risk they have calculated based on your credit score and history.
Having a low credit score could also mean that you’re only offered a shorter repayment period or a co-signer may be required before you are likely to be accepted for a loan.
Although different institutions will have their own standards by which they measure credit scores, here is a general list of the different credit brackets:
- Excellent: 800 to 580
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Don’t panic if your credit score currently lands you somewhere among the lower brackets, as throughout this article we’ll provide you with tips on how to climb the ranks to a perfect score.
How Your Credit Score Is Calculated
The Fico score is the most common type of credit score and was named after the company that came up with it, Fair Isaac Corporation. The information used to determine your credit score is collected by the three major credit bureaus; Equifax, Experian, and TransUnion.
These bureaus look at how many open accounts you have in your name, your debt total, repayment history, and a number of other factors, and use this to estimate your risk level.
The five main factors that they evaluate include:
- Payment history
- Total amount owed
- Length of credit history
- Types of credit
- New credit
To break this down, 35% of your credit score is based on how timely your payments are. The total amount owed and what percentage of your total available credit you’re using, which is referred to as credit utilization, counts for 30%.
15% of your credit score is based on your credit history length, with shorter histories being considered as higher risk as there’s less data to analyse. New credit accounts for the final 10%, including the number of new accounts you apply for which produce credit enquiries.
How To Improve Your Credit Score
If you want to be able to take out a loan or be accepted for a mortgage, you’ll need to have a good credit score. Having a good credit history is beneficial to buy at online catalogues, even though some are available with bad credit, but even if yours hasn’t been great over the last few years, doing the following things can help improve your credit score.
Check Your Credit History
When you’re trying to improve your credit score, your credit history can provide a useful reference point for you to see what has improved or lowered your credit score in the past.
You can request a copy of your credit report from all three of the major credit bureaus once a year for free through the official gov.uk website which will allow you to review your history.
There’s always room for error, so when you check your credit history and review your reports, look out for discrepancies and make sure there is no incorrect information that could be lowering your score. If you spot any mistakes, you will need to report them as inaccurate.
Avoid Late Payments
One of the most obvious ways to improve your credit score is to make sure you pay your debts on time. Although this can be hard if you’re struggling financially, not only will this have a negative effect on your credit score, but late payments can also incur costly penalty fees.
According to Martin Lewis from MoneySavingExpert.com, even “doing this once or twice could cause problems that can cost you for years”, but it’s “defaults in the previous 12 months [that] will help you the most” when you are applying for a new loan.
If you’re having financial difficulties, it’s worth trying to contact your lender, as cliché as it sounds. In the best case scenario, you may be able to alter your repayment schedule which is preferable to defaulting on the payments entirely although it will still affect your score.
Pay Your Bills On Time
The easiest way to ensure you never miss a payment is to set up a recurring direct debit payment with your bank. You can set this to be the minimum monthly amount that’s required per the terms of your lender’s agreement, but we’d recommend paying off more if you can.
The faster you pay back the total amount owed, the less interest you will incur.
Aim For 30% Credit Utilisation or Less
Part of what makes up your FICO score is the amount you owe in relation to how much credit you have available to you i.e. your credit limit. This is called your credit utilisation and it’s best to keep it under 30%. For example, borrowing up to £300 of a £1,000 credit limit.
Having a percentage higher than 30% will make potential lenders assume that you are relying more heavily on your credit and that you might have trouble repaying your debts.
Credit utilisation applies to your total borrowing limit across all of your credit cards and statements.
If, for example, you had one credit card with a £2,500 credit limit and a current balance of £1,000, as well as a second credit card with a £3,000 credit limit and a current balance of £2,000, you would have a 55% credit utilisation.
You can apply this to your own finances by dividing the total debt amount (in this case, £3,000) by your total credit limit (£5,500) x 100 to work out your credit utilisation (55%).
Try To Avoid Requests For New Credit
You may have heard the terms “hard” and “soft” inquiries in relation to credit history checks, which are the two types of inquiries that can be made pertaining to your credit history.
Checking your own credit, for example, falls under the category of “soft” inquiries, as do checks carried out by potential employers, financial institutions you are already in business with, and credit card company checks made before sending you preapproved credit offers.
Soft inquiries do not affect your credit score, regardless of how many you have.
Hard inquiries, on the other hand, can negatively affect your credit score with long-standing repercussions. This includes mortgage application checks and applications for a new credit card or any other form of new credit, which are best kept to a minimum.
This is because requesting multiple forms of new credit triggering “multiple hard inquiries within a short period of time can be predictive of credit risk, so having too many inquiries for different types of credit can result in a lower credit score”, according to Experian.com.
Fatten Up A Thin Credit File
A thin credit file is a term used to describe a short credit history, which means there’s less data and information on your credit report to generate your credit score. This can be a detriment to you when applying for credit as lenders won’t have proof of your reliability.
Fortunately, there are good types of credit that can actually help improve your credit score.
You can fatten up a thin credit file by applying for a second secured credit card which is designed to help users establish a better credit history. It works the same way as a credit card, but you will need to pay a refundable security deposit before you can open an account.
An alternative option is to take out a credit builder loan which is similarly designed to help individuals improve their credit score and financial stability. Usually, these loans are offered by smaller community financial institutions and credit unions, with the money held in a savings account by the lender until the loan is paid off, at which point the funds are released.
Don’t Close Down Old Credit Accounts
While we wouldn’t blame you for thinking that paying off your student debt sooner rather than later will have a positive effect on your credit score, it could actually be better to spread out the payments over the years to keep the account open, as it’s age will boost your score.
The same goes for most of your older and unused credit card accounts, as these can positively affect your credit score by contributing to your average credit history. This is because potential lenders prefer to have demonstrable proof of your responsible lending.
You will be rewarded by the systems that determine credit scores for having long-standing accounts, so even if you haven’t used them in a while, it’s worth keeping them open.
Additionally, closing down old lines of credit will reduce the amount of overall credit available to you and will lower your total credit limit, meaning your balance-to-limit ratio and therefore your utilisation rate will increase, potentially pushing it over the recommended 30% limit.
Consider Taking A Loan To Pay Off Any Debts
Sometimes our debts creep up on us, and what was once only a small portion of your total credit limit is now a significant amount of money owed and working against your credit score.
In some cases, it can be beneficial to pay off high-interest credit card debt with a personal loan, which often involves lower interest rates, but you’ll need to check the terms and rates per your loan agreement to ensure that you’ll be able to repay it in time to protect your score.
It might be worth applying for a debt consolidation loan, as being bound by interest rates that are even slightly lower than your credit card debt can have a huge impact on the total amount needed to be repaid by the end of your agreement, potentially thousands of pounds.
The basic principle behind both of these types of loans is to pull all your debts from each of your credit cards to create one monthly payment, rather than having to manage multiple individual payments which leaves you at a higher risk of forgetting or missing a payment.
Choosing a longer payment term will increase the total amount of interest you will need to pay, but if it allows you to make smaller, affordable monthly payments then you’ll be more likely to pay them on time which will protect your credit score against missed payments.
Opening New Accounts Responsibly And Paying Them Off On Time
While it’s true that you should only apply for new credit accounts when you need to, opening new accounts responsibly and paying them off on time can help to improve your credit score.
As we’ve just mentioned, having older accounts can help build your credit history, but what about when you don’t already have older accounts to keep open? Remember when we mentioned the downsides of having a thin credit file?
Someone who has never taken out any form of credit, like for example, someone who has never applied for and been approved for a credit card, will be viewed as a higher risk by lenders than someone with a proven track record of managing their credit responsibly.
The only way to build credit and to prove your reliability to lenders is therefore to apply for credit (responsibly!) and to keep on top of your payments so that you pay them on time.
Raise Your Credit Score In The Long Term
Unfortunately, there is no quick fix to improving your credit score, despite the terrifying speed with which it can fall after even a single missed payment.
When asked how long it will take to improve your credit score, the Money Advice Service advised that “credit history is built up slowly over time as you increase the number of on-time payments you make”, meaning this is something that you will have to commit to long-term.
You need to pay attention to your credit score, making sure to check in with your reports and keep an eye on your score so that you can track how you raise it over the long term.
It’s also worth noting that after six years, the majority of the negative strikes that are against you as a borrower will be wiped from your file. This can include things like missed payments, defaults on any agreements, bankruptcy, and County Court Judgments (CCJs).
Manage Your Credit Cards Responsibly
When you’re trying to improve your credit score, it’s essential that you can prove to potential lenders that you’re responsible with your credit and that you can manage your credit cards.
Here are a few of our best tips for managing your credit cards responsibly.
- Create payment reminders or set up automatic direct debit payments to ensure that you don’t miss any monthly payment deadlines.
- Check your bill regularly to make sure there are no surprises.
- Try to keep your total amount of debt to a minimum and stay within your limit.
- Avoid moving debt around by transferring it from one credit account to another, and instead, work towards paying it off.
- Apply for new credit cards only when necessary.
- Avoid withdrawing cash using a credit card.
If you feel like you’re struggling to manage your debt and you’d like some advice on how to get back on top of your financial situation, there are also a number of credit repair companies in the UK who will explain your credit report and offer your advice for free.
Track Your Progress
Being able to track the progress of your credit score will allow you to see which key factors have either a positive or negative effect on your score, and how to improve it overall.
The Money Saving Expert Credit Club, for example, allows you to access your credit score and provides you with much more information about your borrowing habits that can help you increase your chances of improving your credit score and be accepted for future loans.
Not only will you be able to get a better indication of how lenders will see you and your applications for credit, but you can also use their unique affordability score which calculates how much you can afford to borrow based on your income and estimated spending habits.
One of the best things about the Money Saving Expert Credit Club, although it’s worth noting that there are other similar services available, is that it also provides an eligibility tool that will pull up the best credit deals available to you and the likelihood of you being accepted.
Things To Avoid That Can Lower Your Credit Score
Now that we’ve walked you through the things you can and should be doing to improve your credit score, it is time to warn you of some of the key factors that negatively impact how you come across to potential lenders so that you can improve your overall credit score.
Late Payments
It’s the most obvious thing to avoid when you’ve taken out a line of credit, hence why it’s something we’ve mentioned a few times already throughout this article. Even so, late payments are one of the biggest factors that can negatively impact your credit score.
Although different lenders will have different standards by which they measure credit history and some will be more accommodating than others, the majority will view late payments as a sign that you’re less reliable and that there is a higher risk that you will struggle to repay.
This can then have negative consequences when you’re trying to apply for future credit, although there are still ways that you can get a mortgage with late payments and defaults.
If you are late with a payment, the worst thing you can do is bury your head in the sand and ignore it. Debt doesn’t just go away! If anything, it only increases the longer it’s left.
Instead, get in touch with your lender to try and rectify the situation, either by paying or renegotiating the payment to allow you a few extra days before they penalise you for it.
A Short Credit History
Having a limited credit history for potential lenders to review when deciding whether or not to accept your loan application can be detrimental to your case, and may sway the outcome of this decision against your favour.
It’s a vicious circle, but without a big enough credit history, you can’t get a new line of credit. So, without applying for every credit card you come across just for the sake of fleshing out your credit history, we’d recommend sensible applications for credit when you need them.
A good way to build credit sensibly is to take out a credit card with the intention of using it solely for a single purpose, for example, using it to pay for your weekly food shop or petrol, and keeping it locked away the rest of the time so you don’t exceed your credit limit.
Then, each month, you can pay off your credit card debt and as it should only be a small portion of your total available limit, you can start to build up a reliable credit history.
A good way to improve your credit history without actually having to apply for new credit at all yourself is to benefit from someone else’s good credit history instead. If you become an authorised user on another trusted person’s account, you will receive a card in your name.
This allows you to make purchases on the account whilst full responsibility still lies with the primary cardholder and can make changes or restrict your access at any time, but the account history will count towards your credit history report as well to improve your score.
Cancelling Your Zero-Balance Credit Cards
Although most standard advice you’ll see regarding old credit accounts is to keep them open, including the advice we have personally given earlier in this article, there are some instances in which it might actually be more beneficial to cancel zero-balance credit cards.
For example, if you’re already experiencing some issues with managing your credit and your credit score is already quite poor, it’s perhaps a good idea to remove the temptation of further spending and cancel older credit cards to avoid digging yourself into deeper debt.
It’s also worth noting that, while it’s important to try and improve your credit score, you should make financial decisions based on your current situation and your needs rather than how it will affect the three-digit number you’re given to represent your credit responsibility.
In doing this, you will automatically be more likely to make the right decisions for your financial situations which will naturally lead to a higher credit score as you manage them.
Transferring Your Balances To A Single Card
If you’re struggling to manage and keep on top of your payments, there’s a logic behind the idea to transfer your balances to a single card. After all, this will pull all of your debts and therefore payments into one place, theoretically making it easier for you to pay them on time.
In actual fact, transferring all of your current balance to a single card can have a harmful effect on your credit score because it will increase your single-card utilisation percentage, it can lower your credit history length, and it will prompt a hard inquiry into your credit report.
With that being said, a balance transfer can help to improve your credit in certain cases as it could decrease your overall credit utilisation rate helping you to keep it below the 30% limit. It will depend on the lender you’re applying to and whether they rank your individual credit card or overall credit utilisation rate as an indication of higher risk.
Co-Signing Credit Applications
Whilst it doesn’t affect your credit score to simply sign on the dotted line, agreeing to co-sign a credit application for someone who then goes on to default on their payments can certainly have a negative impact on your credit score, among other consequences.
If the main account holder is late with or misses a payment, you may be required to pay the amount yourself which could cause your credit score to drop, and your total debt may increase due to any debt your co-signer has which will be included in your own credit report.
There’s also a chance that your credit score won’t increase due to having mixed lines of credit, which can be off-putting to potential lenders unless you have a proven track record of managing these finances well whilst keeping your overall balances low and paying on time.
Not Having Enough Credit Diversity
According to Amrita Jayakumar in an article for NerdWallet, credit diversity does influence your credit score in various ways depending on your previous track record and credit history.
You could have a great credit history with one particular type of credit, like a credit card or student loan, but this doesn’t necessarily mean that you’ll be a responsible borrower when it comes to taking out a mortgage loan, for example, which can affect your overall score.
To demonstrate to potential lenders that you can be trusted with all forms of credit, it’s worth adding some variety to your credit history without applying for things you don’t need at all. If you’ve only had an auto loan before, try applying for a credit-builder loan, for example.
Not Looking Into Your Credit Reports
When it’s as easy as requesting your resort from the gov.uk website, there’s no excuse for not looking into your credit reports, especially when not doing so can harm your credit score.
It’s easy to miss things you may be doing that are adversely affecting your credit score, but checking your credit reports will help you spot any negative trends or links between your spending history and changes to your credit score, so you can cut out anything lowering it.
So, request your credit report and get reviewing!
Summary
As you can see, there are plenty of ways you can improve your credit score, and there’s always help available to you if you’re struggling to stay on top of managing your debt.
Equally, there are plenty of things that you may be doing, perhaps without even realising, that could be potentially lowering your score and making you look less desirable to lenders.
We hope that after reaching the end of this article, you have a much better idea of how to go about setting your own credit score straight and setting yourself up to be in the best position to apply and be accepted for credit in the future as and when you may need it.