What is a credit score and how do you improve yours?

I never liked credit cards because I don't like owing people money. I know that might sound strange to some, but the thought of being indebted to another person just makes me uncomfortable. I learned the hard way when I realised that I didn't have a great credit score even though I wasn't owing anybody.

This was because I always paid for all my purchases either by cash or debit card. So, when I wanted to apply for a high limit zero percent credit card, I realised that I wasn't eligible for the credit! I was surprised. I needed that large borrowing for something very important so I wasn't a very happy bunny. So, I have had to learn how to apply for a credit card and build up my credit profile slowly.

In this article, we will talk a little more about what a credit score is, why it's important and how to improve yours.

What is a Credit Score?

A credit score is a number that is used to judge how credit-worthy you are, it is like an exam mark which lenders use to assess how likely you are to repay borrowed money. In the UK, it's important to have what I call a financial footprint because it is this footprint that the financial services will use in assessing your credit rating. This simply means, that they want to find out if you the type of person they could trust to lend money, and can you repay? They want to know how reliable you are and how risky it is for them to lend you money. In the UK, credit scores range between 0 and 999, depending on the credit reference agency you use (e.g., Experian, Equifax, or TransUnion).

Why is Your Credit Score Important?

A good credit score can help you:

• Get better interest rates on loans and credit cards.
• Increase your chances of being approved for mortgages and other financial products such as a car loan.
• Improve your likelihood of getting rental agreements, phone, water, electricity and gas contracts with utility companies.
• Access more money if you're applying for a loan such as credit cards, bank loan etc.

Things that Affect Your Credit Score

There are so many behaviours and footprints that we leave as we interact with businesses on a daily basis that can affect our credit score. Here are a few things to beware of:

1. Pay your bills on time, always.
2. If you have a credit card with a certain limit, try not to use all the available credit on the card.
3. It's important to keep old bank accounts, as this shows that you are stable. Also, then length of time you stay at an address or keep a phone number all count towards your credit worthiness.
4. It is useful to have different types of credits- for example, a mortgage, a car loan, credit card, etc. but the most important ting is that you can consistently pay your bills and any money owed on time

Top Tips to Improve Your Credit Score

1. Pay Bills on Time- Set up a standing orders and direct debits so that these payments leave your account on time, and avoid missing payments.
2. Check Your Credit Report Regularly- You can get a free credit report from credit reference agencies (Experian, Equifax, or TransUnion). When you get your report, look through them carefully, for inaccuracies, such as incorrect addresses or accounts that don’t belong to you, and report them. You might notice some names of addresses that don't belong to you. Maybe an ex-partner or a fraudster impersonating you.
3. Register on the Electoral Roll- Contact the council and register to vote on the electoral register. This helps to verify your address and improves your chances of applying successfully for loans.
4. Reduce Your Credit Utilisation- Aim to use less than 30% of your total credit limit across all accounts. For example, if your limit is £1,000, try to use no more than £300. If possible, ask for a credit limit increase but avoid spending more.
5. Avoid Applying for Too Much Credit at Once- Avoid making too many credit applications within a short period of time. So, if you're thinking of applying for mortgage, avoid also applying for a credit card within the same period.
6. Keep Old Accounts Open- It's good to keep old bank accounts, as this shows that you are stable. Try to keep old bank accounts open even if you travel outside the country. Also, the length of time you stay at an address or keep a phone number all count towards your credit worthiness. These behaviours show that you're stable and reliable.
7. Limit ‘Hard Searches’- Avoid unnecessary credit checks. Each time a lender checks your credit report (a "hard search"), it can slightly reduce your score. Instead, use "soft searches" (like price comparison websites) when shopping for loans or credit cards.
8. Build a Positive Credit History- If you don’t have much credit history, you can try applying for a credit-builder credit card or loan. As mentioned above, use the credit card responsibly by paying off balances in full each month.
9. Disassociate from Financial Links with Others. Try to build your own, personal, credit worthiness. Be careful of who you are associated with in relation to finances. If you have a joint account or mortgage with someone with poor credit, it may negatively impact your score, so be wise! Request a ‘financial disassociation’ from credit reference agencies if you are no longer financially linked with that person.
10. Pay Down Debt Strategically- Prioritise paying off your most expensive debts first. Consider debt consolidation if you have multiple loans, but ensure you keep up with payments.

Things to Avoid

How Long Does It Take to Improve Your Credit Score?

Building your credit score takes time, commitment and discipline. Remember that consistent positive behaviour, such as paying bills on time and reducing debt, can improve your score within 3-6 months, but it may take longer depending on your individual financial situation.

Credit Score Ranges in the UK

• Experian:
  • 0-560: Very Poor
  • 561-720: Poor
  • 721-880: Fair
  • 881-960: Good
  • 961-999: Excellent
• Equifax:
  • 0-438: Poor
  • 439-530: Fair
  • 531-670: Good
  • 671-810: Very Good
  • 811-1000: Excellent
• TransUnion:
  • 0-550: Very Poor
  • 551-565: Poor
  • 566-603: Fair
  • 604-627: Good
  • 628-710: Excellent

Resources to Check Your Credit Score

1. Experian: experian.co.uk
2. Equifax: equifax.co.uk
3. TransUnion (formerly Callcredit): transunion.co.uk
4. Free Credit Reports: Try websites like ClearScore and Credit Karma for free access to your credit report and score.

Remember: Improving your credit score requires time, discipline, and consistent effort, but the long-term benefits are worth it!