Understanding Your Credit Score to Improve It

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That magic formula for improving your credit score, as elusive as it sounds, is the combination of a ton of hard work and effort on your part. The reality is, your actions affect your credit score, and only your actions, in turn, can improve it.

Choosing to improve your credit score will never be a bad decision. However, depending on your financial history, this could be a long road to recovery. But thankfully, not impossible, it is always possible to recover from bad credit in time, and it involves you making better financial decisions consistently.

There Is No One Size Fits All Credit Score

There is no one universal score in the UK that all lenders look at when deciding to lend you money. There are four main agencies which are;

TransUnion Limited (formerly Callcredit), Consumer Services Team, PO Box 491, Leeds LS3 1WZ
Crediva Limited, Customer Services, Global Reach, Dunleavy Drive, Cardiff CF11 0SN
Equifax Limited, Customer Service Centre, PO Box 10036, Leicester, LE3 4FS
Experian Limited, Customer Support Centre, PO Box 8000, Nottingham, NG80 7WF

No one can access your credit score without permission. When you apply for credit, lenders will run a search using their preferred credit agency to determine their decisions based on your information. The information these agencies hold on you can vary and is compiled using data from your payment history, the electoral roll and publicly available records such as court documents.

Hard and Soft Searches

When you make an application for any credit, be it a credit card, loan, car finance or mortgage etc., it leaves a digital footprint on your credit file. You can see all requests for information, and there are two different types of searches performed by lenders.

A soft search leaves no trace on your credit record but is visible to you. Many lenders use this approach to predetermine if someone will be accepted without harming their credit score. A hard search will be performed, and if this comes back to meet their requirement, the application proceeds.

A hard search is when other lenders look at our credit file and record this search. If the search results in a refusal for credit, other lenders will be able to see this.

Making too many searches for credit in a short space of time can indicate you are struggling for money and can make lenders wary, especially if the initial requests are done via a hard search and denied.

Determining Your Credit Score

All of the different credit agencies use different scoring criteria and ratings. Each has its own limit as to what is deemed a good credit score, a poor one or even a very poor one. As an example, this post looks at improving your credit score from very poor or poor, which is;

Equifax

Poor – 280-379
Very Poor – 0-279

Experian

Poor – 561-720
Very Poor – 0-560

Transunion

Poor – 551-565
Very Poor – 0-550

There is a range of different apps you can use to check your credit score. CheckMyFile, for example, is £14.99 a month and allows you to check all the details help on the above three agencies. However, Totally Money is a free credit app that allows you to see your score from Transunion, and Experian has its own app that is free to use forever.

How Can You Improve Your Credit Score?

Without further ado, let's look at some of the best financial practices and habits to help you improve your credit score. Don’t be fooled every decision you make has an impact, including how you pay for your utilities!

Pay on Time

Pay all of your household bills on time and keep up to date with at least the minimum payments on any credit accounts you have. Paying more than the minimum will look better if you can; however, it is better to pay the minimum on all your accounts and keep them in good standing than to miss one payment to pay more on a different account.

The previous 12 months are what matters most to lenders, and this will be one of the main influences in their decision to lend to you or not.

Electoral Roll

Did you know all lenders look for the electoral roll to better picture who you are and your residential history? If you aren't on the electoral roll, then this information won't be available and not only will you be unable to vote, but you will also be refused for things such as mortgages, car loans or even credit cards.

Utilise Your Credit

If you have a credit card you don't use and is free from a balance, it can, in some cases, be better for you to close the account. Lenders like to see how you are utilising your level of credit and how you pay it back to build a clear picture of what type of borrower you are.

Maxing out your credit cards is great if you can clear all or most of the balance each month. But constantly using over 25% of your available credit per credit card can impact your credit score. So on a credit card with £1,000 balance, keeping your balance at or below £250 will help you maintain or boost your credit score.

Avoid Borrowing to Pay Off Other Credit

Taking out a loan to pay off another loan is called a consolidation loan. And in some cases, this can be a good idea. If you have a good credit score and maintain your minimum payments without affecting your household bills, then using one lump sum to pay off your debts can be a good option. However, you need to be strict with yourself to avoid running up the credit on any credit cards or loans you have access to so you don't inadvertently end up owing more.

You must pay attention to the lenders who agree to loan you money to pay off your bills. For example, doorstep lenders have a history of being quick and convenient and usually come with high APRs but smaller weekly payments.

Right now, Morses Club refund claims are being processed by claim management companies and individuals alike who have been mis-sold loans that caused them into debt to repay. The main target of these loans is those with existing bad credit who are likely to be turned down elsewhere. Check if this applies to you and assess your borrowing behaviour to get out of this vicious cycle.

Check for Mistakes

Mistakes do happen. Each person you hold a financial account with is responsible for updating the credit agencies on your behaviour and ability to pay on time and stay within set credit limits. Sometimes, there can be errors or mistakes or information isn't updated at all.

In some circumstances, cybercriminals may have committed or attempted to commit fraud in your name. Check carefully that you know of all applications and requests for credit and apply for any mistakes to be removed via the correct channel with each agency.

If there is a genuine mistake and you can provide it, it will be removed from your credit file.

Financial connections

Do you have current or past financial connections? Maybe you took out a loan with your now ex-spouse or partner? Or you cosigned a loan together, maybe? If this account has been cleared, you can request for this connection to be severed. Especially important if their credit is harming yours by association. If money is still owed on the account, you need to make sure this is paid off before disconnecting your credit files and associations.

Use Soft Searches

If you are unsure of your ability to be accepted for credit, you must be aware of your credit score using one of the many free methods available to you. This will give you a better idea of how likely you are to be accepted.

Remember, hard credit scores that are denied can harm your score. So first, look to see if a soft search is performed first to assess your suitability. If this looks promising, then you can continue with the application.

In conclusion

You do not have an automatic right to be lent money. Lenders risk losing money if they lend to the wrong people. This is a fact and is the driving force behind credit applications. The simple fact is, you need to make yourself as attractive as possible to lenders to ensure you have the best possible chance of being accepted. A poor credit score can affect more than just if you get accepted for a credit card or not. It can impact rental housing applications if a landlord checks on you, mortgage applications and getting finance for a car.

But, it is never too late to make amends and start improving your credit score. Paying down debt, making payments on time, and being financially responsible are great places to start and can give you a boost to your credit score faster than you think!