Top tips for improving your credit score

When it comes to borrowing, whether it’s a short-term personal loan, a mortgage or even a phone contract, lenders will assess both your credit risk and your affordability to determine if you’re a good fit for their business. In nearly all cases, this will involve a review of your credit file.

Credit scores, or credit ratings, aren’t universal. Each company you deal with, from credit providers to credit reference agencies, will have different rules and will score you differently. That said, common principles are applied and it’s likely the same factors will contribute towards the way each organisation determines your credit score.

Factors such as how much you currently owe and your history of managing debt are combined to give an overall rating so there are plenty of ways for you to take control of your finances and work to improve your credit score.

Before we get stuck in, remember that a calculated credit score is not a reflection of you as a person. It is simply a score that helps lenders determine how well the product fits with your personal circumstance.

Your credit score can change depending on your circumstances, so it’s perfectly possible for you to take active steps to improve it.

While most lenders will have their own system for determining a customer’s credit rating, there are some key factors most lenders and credit bureaus will take into account. Here are some top tips to help you positively influence your rating…

1. Check your credit file

Step one on your way to improving your credit score is to make sure your credit file is correct and up to date.

You should periodically check your credit file to make sure it’s free from any errors. If you do spot anything untoward, this could be a sign of fraudulent behaviour. Most of the time, though, incorrect information is usually a mistake that can be easily corrected by contacting the lender directly and asking them to rectify it.

If, for whatever reason, your loan application is rejected, always check your credit report before reapplying elsewhere. You don’t want to be adding more searches to your credit file when there may be an obvious issue or mistake on your report that’s easily fixed — and thus making it much more likely you’ll get accepted on your next try.

2. Make sure you’re on the electoral roll

If you’re not registered on the electoral roll under your current address, it’s important to get this updated. You should register whether you’re a homeowner, living in rental or shared accommodation or living at home.

3. Build up your credit history

Having a slim credit file can make it difficult for lenders to assess your credit worthiness and can result in a low credit score. This is a common problem for young people, people who are new to the country or people who, for one reason or another, simply haven’t used a lot of financial services.

It’s not a good idea to take out credit with the sole aim to improve your credit rating. It’s better to simply allow your credit profile to improve naturally over time by using products that suit your lifestyle at the time. For example, paying for your utilities, insurance or mobile phone monthly is a good way to build up your history.

If you are struggling to get credit due to having minimal (or non-existent) credit history, you could consider getting a credit card that’s specifically designed to accept people with a poor credit history. These types of cards have low spending limits but a higher-than-average interest rate which will apply if you don’t repay your debt on time each month. Provided you do repay the card in full each month without issues, this type of credit card could be a good option if you need to build up your credit score.

Do be careful before taking out a credit card, though. If there’s a risk you will overspend or you won’t be able to pay off the balance every month, you could end up doing more harm than good to your credit history.

4. Manage your debt burden

One simple way to maintain a good credit score is to make sure you only borrow as much as you need.

While it often works in your favour to demonstrate past credit behaviour, too much debt could impact how lenders view your affordability. If your debt burden is too high, or you’re currently in arrears, this could indicate you won’t be able to take on any other credit commitments.

You’ll need to be able to show you can take on the amount of debt you’re applying for so, if you want to improve your credit score, aim to keep your debt-to-income ratio low (that’s making sure you have enough money coming in to comfortably pay off your current credit commitments).

5. Avoid multiple hard searches

Lenders are likely to carry out a hard credit check as part of the application process. These hard credit checks will stay on your report for two years — so think carefully before triggering these. Even fairly typical processes such as signing up with a utility company or renewing your mortgage can result in multiple searches on your file, so do be mindful of this if you’re planning on applying for credit or a loan shortly after.

It might seem like a good idea to apply for several loans in quick succession to test the waters and potentially compare interest rates. Or you might have been turned down by one lender and think it’s a good idea to try with another.

Whatever the circumstances, even though lenders won’t be able to see the outcome of these applications, lots of hard checks appearing on your report is an issue and suggests financial instability. A lot of lenders will see multiple hard checks on your report as a red flag, so be aware of this and do your research on the lenders you’d like to borrow from before hitting ‘apply now’.

A great option is to use soft search functionality. Certain lenders or loan comparison sites allow you to see the rate you’re likely to receive – plus the likelihood of your application being accepted – without any impact on your credit score. This is a great way to get an idea of how much borrowing money could cost you, without a hard search being recorded on your credit file.

6. Keep up with your payments

Paying your accounts on time and in full each month is a good way to show lenders you’re a reliable borrower, and capable of handling credit responsibly.

Evidence of missed or late payments is likely to show poor past debt management so you want to avoid missing any payments if you’re aiming to boost your credit rating.

If you do happen to forget the occasional payment, make sure you rectify the situation promptly and never allow your account to go two or more payments in arrears without contacting your lender to try and resolve the situation.

7. Don't spend to your limit

If you have a good credit history but would like the best chance of getting the lowest interest rates, it’s a good idea to hold credit card accounts with higher credit limits – but don’t spend to the limit. There are two caveats to this:

• If there’s a risk you might impulsively spend more than you can afford, stick to a lower limit instead
• Ensure your credit limit is still in-line with your overall affordability (i.e. you’d theoretically be able to comfortably pay off the maximum amount you could spend on your credit card, even if you never reach this limit) as lenders may factor this into their affordability calculation

If possible, try and keep your credit utilisation at 30% or less. Your credit utilisation is the percentage of your credit limit used. For example, if you have a limit of £2,000 and you’ve used £1,000 of that, your credit utilisation is 50%. Usually, a lower percentage will be seen positively by companies, and will increase your score as a result.

8. Be aware of poor money management

Lenders don’t like to see evidence of poor money management, so make sure your credit report doesn’t show off any red flags such as withdrawing cash using your credit card or taking out a payday loan.

If your credit record does show evidence of previous payday loan applications, you could decide to wait until old issues are cleared from your file before applying for a credit card, mortgage or loan. Depending on the credit reference agency, information about a payday loan could stay on your record for up to six years (or even longer if you’ve missed a payment).

9. Submit a notice of disassociation

If you have a financial link with another person who perhaps doesn’t have a good credit score — such as a joint bank account or mortgage — you may find this could impact your credit score too.

If you are no longer financially involved with that person and want to make sure their poor credit score doesn’t have an adverse effect on your own, get in touch with each credit reference agency to request a notice of disassociation. This will remove the financial associate from your file and help to make sure their credit score won’t be taken into account when lenders are making their decision on your creditworthiness.

10. Keep things consistent

Lenders like to see stability. An applicant who owns their own home and has held down the same job for years is likely to be seen as a safer bet than someone who’s hopped between addresses, employers and banks in quick succession as this could indicate they’ve experienced financial struggle along the way.

If you can, try to make sure your credit report indicates stability. While it’s not always viable to avoid moving homes, it’s a good idea to try and stay at a fixed address for as long as you can. There are also other measures you can take - for example, if you have any active accounts (such as a mobile phone contract) registered to an old address, it could make a difference to your credit score to update the account to reflect your current address.

What is a good credit score?

As there is no universal scoring system, there’s no set criteria to decide what score is ‘good’. Put simply, the higher the score the better.

Credit reference agencies all use a scale of excellent, good, fair, poor and very poor. But you will find that each credit reference agency will use different number brackets to reflect their scores:

• Experian scores are between 0-999. ‘Good’ ratings run from 721-999.
• Equifax scores are between 0-1000. ‘Good’ ratings run from 531-1,000.
• TransUnion scores are between 0-710. ‘Good’ runs from 604-710.

Though finding out your credit score according to the three main credit reference agencies is a good idea, it’s worth knowing that finance providers are likely to work out their own credit scoring system too. That means, even if you think your credit score is high enough to borrow at the best interest rate, your lender may feel differently. Your credit score forms just part of the decision-making process.

How to check your credit score

It’s free to access your credit report and credit score online. The easiest way to check your credit score is by visiting the main credit reference agencies’ partner websites: MoneySavingExpert’s Credit Club (Experian), ClearScore (Equifax) and Credit Karma (TransUnion).

Do be mindful that these organisations will often only provide you with a generic credit score for generic products. While they can be useful as they’ll give you a sense of what behaviour might negatively impact your score, this shouldn’t be taken as gospel. These credit scores are purely illustrative.

How will my credit score affect me?

Your credit score is likely to impact how much money you can borrow and at what rate.

Credit scores are a good way for lenders to predict how likely you are to repay your debt. A good score indicates you’re likely to be a good customer and pay back the money you owe on time, whereas a bad score might show you’re more of a risk. In this case, a lender may charge higher interest rates or decline your application altogether.

Do keep in mind, though, that credit scores are not universal. The way one lender assesses your affordability and credit risk for one product could be very different compared to an alternative lender or product.

I have a good credit score; will I get better interest rates?

If you can show you have a history of managing debt responsibly, your lender is more likely to offer you a lower interest rate. This is because you’re perceived to be more likely to pay back what you owe on time each month.

That said, every lender has different criteria, and credit score isn’t the only factor they’ll take into account so don’t be too disheartened if your credit score seems good but you’re not offered the very best rates. Every lender has their own lending criteria that could impact the outcome of your application (though, as we’ve mentioned before, avoid rebounding and applying to several different lenders in quick succession if you do get declined for a loan).

I’ve got a good credit score but I’ve been declined. Why?

Being declined for credit, or not receiving the best rate, isn’t always indicative of a problem or an urgent need to boost your credit score. Finding the right product, from the right lender, to suit your personal and financial circumstances is key.

For example, a low APR loan may have a very low acceptance rate. In this scenario, you would have to have a very good credit score indeed to be accepted for the loan, let alone receive the best interest rate.

Though it can be frustrating not to receive the best rates on the market, ultimately the decision may be down to factors you just can’t change.

I have a low credit score; how will it affect me?

Having a low credit score can be an indication to a lender that you’re a “high-risk” borrower. This means you’re likely to be offered a higher interest rate or your application may even be refused.

If you have a very low credit score as a result of poor credit management in the past, you could be denied a credit card or loan in the future. You could also be refused a tenancy if you’re renting, you might not be able to take out a phone contract and it may even affect the chance of getting that job you want as some businesses run a credit check as part of their recruitment process. So it really is important to try and mitigate any damage to your credit score by engaging with your lender or StepChange if you do experience financial difficulty.

Unfortunately, sometimes those who have struggled to repay credit in the past are unable to rectify the situation at the time and this results in historic bad information being recorded on their credit file.

It's true that bad information stays on a credit file for 6 years, though if you can prove your affordability has significantly improved this may not exclude you from the credit market entirely. Be prepared to be offered a higher APR as a result of your poor credit score, though.

Over time, your credit file (and your credit score) should improve as long as you don’t borrow more than you need and stay focused on making your repayments on time.

Are you ready to apply for a loan?

If you’re looking to achieve your goals sooner, and believe you have a strong borrowing profile including a good credit score, you could find a personal loan is a great option for you.

Apply now to receive an instant decision and, if accepted, the money you need could be with you in just two working days.

With Novuna Personal Finance, you could borrow between £1,000 and £35,000 with competitive rates from as low as 6.9% APR Representative (£7,500-£25,000).