Credit scores play a critical role in our financial health and financial options.
Despite living in a credit driven system, many still don’t know how to improve your credit score.
Almost everyone has made some decisions in the past that have really messed up their credit scores, myself included.
I even shared my story in a newspaper to get the message out there for people to not ignore their credit scores.
My score was a mess because of past mistakes namely taking out a phone contract for a friend.
This ‘friend’ eventually didn’t pay the bills and because it was in my name I paid the price.
That price was years of building my credit score back to a good level to get a mortgage.
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What Is A Credit Score
Your credit score is a numerical expression of your creditworthiness.
In simpler terms, it’s a score of how good you are at paying back what you borrow.
This represents about how risky you are in the eyes of a lender.
Credit scores are built based on the information that is held on your credit report.
Your credit report is a file that has all your personal, financial and payment history of your accounts.
Everything you’ve had and done with credit over the last six years is recorded on this file.
Why Does Your Credit Score Matter?
As I said earlier, we live in a credit driven system.
The standard and normal need for a credit score is around borrowing money.
If you need a credit card, loan or mortgage, your credit score (and credit report history) impacts your application.
Alongside that, some estate agents check your credit score before allowing you to rent out a place.
And some employers do credit checks as part of the pre-employment checks, especially in finance and insurance.
How To Improve Your Credit Score
The top reason why credit scores a bad are because of bad history.
Missed or late payments, multiple credit applications and unpaid debts all result in bad history.
Improving your score is about handling the bad and pouring more good to flush out the bad.
Let’s get into it.
Check Your Credit Report
Firstly, you can’t improve what you don’t know.
Your credit score is a number that is formed based on the information that is held in your credit file.
A credit file is where all your financial history and personal details are, alongside other credit-related data.
Therefore, you need to find out what’s currently in your file that has resulted in you having your score the way it is.
The aim here is to check that everything is correct and up to date, and to really dive deep into what is messing up your credit file.
When we did this we saw defaults we didn’t even know we had to our names (more on defaults later).
The thing to realise about credit scores is that there is no universal credit score.
In reality there are three companies that give credit scores and they all score you very differently.
I would recommend checking all 3, or at least 2 of them.
Register to Vote
Registering to vote helps in validating your address, and showing the lender that you’re not hiding.
Remember I told you that your score, in the eyes of the lender, is about how risky you are to not paying back what you borrow.
Well, if they know where you live then that risk is lowered right?
This is not to say that without registering to vote your credit score will not be good but it’s such an easy win to get an increase on your credit file.
Every point helps when you want to improve your score.
You can apply to vote at any time on Gov.uk.
If you aren’t eligible to vote in the UK (mainly non-Commonwealth and non-EU foreign nationals), send all three credit reference agencies proof of residency (utility bills, a UK driving licence, etc) and ask them to add a note to verify this.
Reduce Your Credit Utilisation Ratio
Credit utilisation (aka debt utilisation) is the total of credit you have available minus the amount of debt you owe.
Let’s say I have 2 credit cards with a total of £5,000 as my available credit limit between them.
If I spend £500 and I slowly pay it back over time, then my credit utilisation is around 10%.
If I spend £4,000 and I pay that back slowly over time then my credit utilisation is around 80%.
Credit score companies recommend you keep your overall credit utilisation under 30% for a good score.
If yours is over 30%, then reducing it will improve your credit score.
Paying off your credit card debts is easier said than done, but it can be done!
Deal With Defaults
One of the major things people face with low credit scores is defaults.
A default is something that a lender applies on your credit file after a string of missed payments.
The technical meaning of a default is failure to fulfil an obligation to repay debt.
For example, you sign a phone contract to pay £50 per month and you don’t pay it for 3 months, then they apply a default.
Your credit report shows 6 years history and defaults stay on your file for 6 years, after that it disappears (even if you don’t pay it back).
However, I wouldn’t say that’s good practice. Pay back that which is owed from you.
I’ve had those letters with bold red letters saying‘overdue amount owed pay back now’until I stopped getting them.
I thought I was in the clear and they had forgotten about me until I looked at my credit file years later.
To deal with defaults, get in touch with the lender and plan to repay it.
Once it’s repaid it will show as ‘Settled’ on your credit file.
This reduces the impact on your credit file which improves your score.
Dispute Errors
If there’s something on your credit file that is not right, not updated, or worse, not yours, you can raise a dispute with the credit reference company.
This includes, an account showing you owing money that you’ve paid off already, a default that shouldn’t be there, an account you don’t recognise or have never applied for.
Disputes are free and you should receive an outcome notification within a month.
Regardless of the outcome you won’t be penalised or impacted by raising a dispute.
If anything it will bring to light what you didn’t already know.
Use Credit Builder Credit Cards
Generally speaking, when you have a low credit score you have little chances of being accepted by traditional banks and lenders for credit.
There are specific credit cards for you if you have low credit called Credit Builder Credit Card.
These are great if you have a low credit score but no active debts or any debts for that matter.
If you’ve never borrowed before you can’t have a good credit score because you have no credit history.
There’s nothing special about these, at the end of the day it is still a regular credit card.
The only difference is that they have a higher interest rate than other credit cards.
Don’t be alarmed just yet!
As long as you pay back the whole amount that you spend every month you won’t be charged any interest.
If you spend £100 this month and pay it all back the next month, then you pay ZERO interest.
Interest is only charged on amounts that you don’t pay back by the next month.
And that is your strategy. Use the card for something you already have money for and pay it back in full the next month.
This shows that you can pay back what you borrow, above all that is the whole point of a credit score.
No More Missed Or Late Payments
This is so crucial to improve your credit score.
With all your bills, contracts and debts, pay on time, every time!
Your score is about how good you are at paying back what you borrow.
If you miss payments it seems as though you have financial difficulties in the lender’s eyes.
If you know you are going to miss payments or if you have just missed payments, talk to your lender immediately.
Discuss your situation with them and come to a resolution that does not impact your credit file.
The danger in hiding and staying silent is that the lender can mark that missed payment on your file and worse, apply for a default.
A simple solution is to automate your bills via direct debit.
Set up a separate bills account to cover this if it’s easier for you,.
A much better solution is to have a budget.
A budget is your plan on where your money is going each week or month. Planning ahead allows you to pay on time.
Alternatives to Credit Cards
There are new digital solutions that allow you to build your credit score without getting into debt.
Loqbox and Bits are two companies in the UK that allow you to do just that.
Have a look at our Loqbox review and a Bits review.
Take Action And Improve Your Credit Score
Now that you know how to improve your credit score, save this and put the plan into action
Which of these tips are you going to try? Don’t forget to register to see your credit file.
Share this with your friend, family, or partner for them to also know how to improve their credit scores.
Download our Free Financial Health Check to give you a good overview of your financial health.
Let us know how you’re getting along by getting in touch with us, we’d love to hear from you
Knowledge is powerless without action
So take action, and take care
Thando