In my last article (Your Credit score, what it is, how to check it and why you should care), we looked at exactly what your credit score is and why you should care about it. We also looked at a few different ways you can check it for free.
In this article, we will concentrate on the best ways to improve your score.
Whether you’ve suffered from debt like me (My Article on how I managed to get out of a 15-year debt cycle), or have just struggled with your finances, the majority of people will find themselves at one time or another with a less than perfect credit score.
It’s something we worry about, but something we can fix without any major changes (although there are a few if you’ve really been struggling).
It is worth noting at this time, that just because you may have a less than perfect credit score, this does not necessarily mean that you have had financial difficulties in the past.
A lot of people who are looking to improve their score may well just find that they have never really had ‘credit’ in the past.
Some may argue that this should not be looked at as a bad thing, and it is not as such, however, rightly or wrongly lenders need to see some form of credit history to be able to assess as to whether you are a responsible person with finances and ultimately, if they should lend to you.
Lending doesn’t always need to be by way of a loan or credit card.
Store cards, mobile phone contracts, insurance, even household utility bills all go towards showing a financial history and therefore affect your credit score.
If you are just starting out with credit, maybe you’ve just turned 18 or have never had anything on finance or contract before, then there are a few quick and easy wins for you to implement to help assist with improving your credit score.
These, however, are not just for those new to credit, even those of us that are old and bold can benefit from these if they are not already being implemented.
So here we go. I’ve tried to make this list as comprehensive as I can and although certain points and links are mainly relevant to those of us in the UK, the principles remain the same no matter where you live.
Improving your Credit score
The Electoral Roll
Ensuring you are on the Electoral Roll or the Electoral register is the first step you can take to help improve your credit score (You can do that here).
Being on the Electoral Roll shows lenders that you have a stable address and as such can make you more appealing as a client.
Most if not all credit score or credit report sites will be able to tell you if you’re on the Electoral roll or not.
If you are unsure then you will need to check with your local Electoral registration office (details of which can be found here).
Although this is specific to the UK, the principle still applies anywhere in the world.
A quick google search in your country should show you how to go about registering.
Mistakes on your report
The first thing you should do when you register for any of the services mentioned in my previous article is to get a copy of your credit report and go through it with the proverbial fine-tooth comb.
Little things such as mistakes on your report can adversely affect your score, so take the time to ensure all the information on your report, from the accounts you have to the address they have you registered at are correct.
Make sure any accounts that show on your report are in the correct standing i.e. if you closed the account make sure it says that it has been closed.
You may find that there are old accounts on there that you have simply forgotten about, easily done.
If these accounts have zero balances and are not accounts that you use anymore then get them closed.
Speak to the lender and make sure they close the account and send you a confirmation in the post or by e-mail.
Another mistake that can occur on your credit report is that you can be financially linked to an individual.
This can happen for a number of reasons, if you’ve shared a house with someone and had utility bills in a joint name or if you’ve been in a relationship and held a joint account.
This is not an issue, however, your credit reports and therefore your credit scores will be linked due to that connection.
If you are no longer living together, in a relationship or just no longer have that financial connection, whatever it may be, speak to your credit reference agency who will have a process for raising a dispute. Get this done and get the other party off your report.
We eluded to this earlier. If you are not named on any of the utility bills, then ensure you get your name added.
If you are sharing a house, try and get your name down on at least two bills if possible.
These can include any utilities you can think of, from water and gas to phone and internet, all of them will again show a stable address along with proven payment history.
This very conveniently leads us on to the next measure you can take.
Paying your bills
Now I admit, this one may sound like common sense and really, it is.
I also appreciate that sometimes, this is a lot easier said than done, however, if you are going to improve your credit score this has to be one of the first things you do.
It may take some budgeting and a slight change in how you deal with your finances but if you can tackle this early and get yourself into a better routine with your money, then your credit score will see an improvement.
Enough of ranting, here it is.
PAY YOUR BILLS ON TIME, EVERY TIME.
There are a lot of factors, many that I have dealt with personally that can cause us to have problems with paying our bills, but this needs to be a priority.
If you are having any troubles with this, maybe the bill is due at a very inconvenient time of the month, then speak to your providers.
It can be an uncomfortable phone call, but most of them would rather you spoke to them and informed them of the situation than just didn’t pay.
You will find that a lot of providers will do whatever they can to help, from setting up a payment plan to switching your tariff to one more suited to you. Tough, but just ask the question.
Fraud is something that a large amount of us do not think about, myself included.
It is, however, very important that you keep an eye out for and your credit report is one of the best ways to do that.
Regularly checking your report will enable you to identify any untoward accounts that have been taken out in your name or searches that have been performed using your details.
You may say,
‘Why am I bothered about any searches, as long as they don’t open any accounts in my name’?
Well, Hard searches like those carried out by bank when applying for a loan or credit card stay on your credit history for up to 6 years.
In itself, not a problem, but the issue arises when you are actually looking to apply for credit.
Lenders will see these searches against your name and If there has been a substantial amount of them, then it will seem as though you are desperate for money.
They will also harm your credit score, all leading to you having both, a lower credit score than you should have and a much harder time getting credit when you need it.
In addition, if you have anything like this affecting your score then, IF you are offered credit, you will generally find that you may not be getting the best interest rates.
Swings and roundabouts everyone, keep an eye on your report and ensure that it is correct.
If you suspect fraud in the UK, then you can report it here.
If you think that you have had your identity stolen or are worried about fraud, you can also register for the protective registration service from CIFAS (Fraud prevention).
This costs £20 for 2 years and will add additional checks whenever any credit is applied for in your name, making it that much harder for anyone else to do anything nefarious. You can register for this service here.
Moving home is on par with making sure that you are on the Electoral Roll and that you are keeping up with your payments.
Lenders are looking for stability. Generally, you will find that if you move house a lot (How much lenders regard as a lot is anyone’s guess), let’s say every 2 years, then it shows potential instability which could adversely affect your chances of obtaining credit.
As with everything, they are looking for a stable history and as much as moving home is not always a choice, it should be something you consider in order to improve your score.
Levels of existing debt
It is likely to be no surprise that your current level of debt is a massive factor in your credit score.
This covers everything from credit cards and loans, to store cards and car finance.
If you are up to the hilt in debt, lenders are not going to look at you favorably.
This can put you in a pretty tough position (been there as we discussed in my first article, My Story. Debt, Gambling and moving forward).
If you are in a position where you have a large amount of debt, the first thing you really need to do is stop the rot.
There are many ways in which to do this but it all boils down to the simple truth that although a 0% balance transfer card may make things easier, chances are you’re not going to get one until you have reduced your debt and improved your credit score.
Chicken and the egg scenario, right?
It can be a hard-hitting truth but unfortunately, it is something you need to deal with.
Look at your finances, budget and make sure you can make your payments. If you’re unsure where to start then check out my article ‘Struggling with Debt? My thoughts, experiences and how I managed to get out of a 15-year debt cycle’ where we look at some of your options.
Part of me feels like we have covered this to death already but as it is such an important factor, I’m giving it its own section.
You already know what I’m going to say so please feel free to skip this paragraph if you wish.
Your payment history is a massive attributing factor to your credit score, so something not to be ignored.
Stability everyone, stability. We’ve mentioned it a few times now and when it comes to your payment history things are no different.
Lenders want to see that you make your payments and that you make them on time. There are some people out there that will say,
‘Lenders love people who miss payments, that’s how they make their money with all the extra charges!’
Well, I’m not going there, that’s a whole different discussion. As we’re talking about you and your credit score, just think for a second how it would be if someone asked you if they could borrow some money.
Let’s, for instance, say there’s your dad, who wants to borrow a few quid to buy your mum something nice, he just doesn’t get paid for another week.
He’s worked hard all his life, always paid the bills on time and has always paid his debts.
Let’s compare that to your cousin who is a party boy or girl, always out, always borrowing money from friends and family and rarely paying them back.
Who would you lend money to?
Well, that’s a down a dirty version of how lenders view us and why your repayment history is so important.
When we’re struggling it can be a real kick in the teeth but ultimately, if you have a really good think about it then you have to admit, you can’t really blame them for being careful.
Ultimately, and I hope for the last time:
PAY YOUR BILLS ON TIME, EVERY TIME.
There are a few factors when it comes to credit applications, the first of them being, do you actually need it? If not then ask yourself ‘WHY’ am I applying for another loan or credit card etc, etc.
No good reason? Don’t get it. Concentrate on getting down what you already owe then look at a better card with better rates, balance transfer offers, etc.
Now, if your finances are in order and you do NOT have any outstanding debt, there is an argument for looking for additional credit cards.
I cannot tell you what the optimal number of cards is or even if there is an optimal number, however, I can tell you about a thing called your ‘Credit Utilisation Ratio’.
Credit Utilisation Ratio
Your Credit Utilisation Ratio looks at the amount of credit you have available, i.e your credit limits, versus the amount you actually use every month.
Stands to reason really that a high ratio is bad (Over 80%). In most if not all circumstances, lenders will look more favorably at the person using less than 25% of their available credit every month.
If you can stay at less than 25% of your available credit being used at any time, then it shows lenders that you can plan and manage your finances and stay within your means, not splurging on loads of things you don’t need (like most of us have been guilty of at some point in our lives).
How can more credit help your Credit Utilisation Ratio?
A quick example will do nicely here I feel.
Say for now you have 1 credit card with a £1000 limit, you constantly have around £800 on there making your Credit Utilisation Ratio 80%
Now say you apply for and are accepted for another credit card, again with a £1000 limit.
If you do not use that card, and I mean at all, then look at what it does to your ratio:
Credit Card 1 = 800
Credit Card 2 = 0
Total = 800
Total credit limit = 2000
800 / 2000 x 100 = Credit Utilisation Ratio of 40%.
40%, not outstanding but a lot better than 80%.
The key here is that if you decide to go down this road, you must ensure that you DO NOT use the new card and build up additional debt on there.
As much as your Credit Utilisation Ration going up again, you have to consider the fact that you would be adding another bill every month. Will you be able to pay that off, in full, every month? Only you can answer that.
Applying for more credit
If you find yourself in a position where you would like to apply for more credit, either to lower your Credit Utilisation Ratio or to get a better deal on your credit card, loan, car finance or whatever it may be, then make sure you are taking full advantage of lenders eligibility checkers.
These are the ones you will find on the actual websites for that specific lender, NOT the ones you find on comparison websites.
Use these and ensure that you are eligible BEFORE you fill out the full application.
These may not be 100% and you may find that some say you are eligible only to find you are declined after applying, however, on the whole, they are very useful tools to ensure you are not making pointless applications.
Eligibility checkers go down as ‘Soft Searches’ on your credit report and therefore do not affect your credit score.
Applications for credit are ‘Hard Searches’ and do affect it, that is why it is highly advisable to check before you apply. Just helps stop the detrimental applications from going on your file.
One thing to note is that whenever you apply for new credit, even if you are accepted, it will dent your credit score.
This is totally normal and not something you should worry about.
Keep within your limits (Ideally less than 25% if a credit card) and keep making your payments on time, your credit score will soon recover.
To finish, too many credit applications in a short amount of time just looks bad.
As we discussed in the Fraud section of this article, if you have too many applications then it can appear to lenders like you are desperate for credit.
Now that is going to be a sure-fire turn off for anyone considering lending you money.
Unfortunately, there are some things that you just cannot really do much about, these include CCJ’s, IVAs and Bankruptcy.
If you have ever had any of these then they will have had a big impact on your credit score and will be on your credit report for up to 7 years.
In this instance, all I can advise is that you concentrate on all of the other points we’ve already been through.
Ensure you are making payments on time from now on and keep track of your credit report.
It WILL get better with time, all you need to do is ensure you put in place best practices now so that when you are able to obtain credit, you know what to do and how to deal with it.
To close this rather large article, although I think the topic justifies it, I hope that this has provided you with a few thoughts and a way forward if you are looking to improve your credit score.
I Have also written another article on things you can STOP doing, to help increase your Credit Score. If you are interested, you can check it out here.
It can be a long road, but getting into good spending habits and having even a basic understanding of how your credit report works and what you can do to improve it should see you off in the right direction.
If you have any comments please leave them below and as always.
Here’s to a brighter financial future for all.