Having a healthy credit score lets lenders know that you’re responsible borrower. They will use this reference to make sure that you’re a low risk when considering you for a loan, a credit card, or a mortgage. However, each lender has their own system for how they use this information and we all hold multiple credit reports that they can examine.
What is my credit score?
Your credit score is calculated by applying an algorithm to financial information provided in your credit report. You hold credit reports with three major credit bureaus; Equifax, Experian and TransUnion, and it’s from the information supplied by these agencies that lenders calculate your score and judge your credit responsibility and health.
The main score in use today and considered in over 90% of lending applications is the FICO score. A three-digit number between 300 and 850 is used to represent your credit worthiness. Scores below 600 are considered bad credit with scores of 750 or more considered excellent; ranges of poor, fair and good feature in between. Depending on where you register on the scale will impact how lenders consider you when you apply for credit. It doesn’t just impact whether you’re approved for a loan or not but often the terms and interest rates you will be offered.
To get the best from any credit application you should aim to score as highly as possible — here are some suggestions to take care of your debts.
Check your score is correct and up-to-date
Checking your credit report is accurate and up-to-date is the first step to take. There are areas that can affect your score that aren’t even associated to how you borrow and pay back money. Check all personal details are correct. If exactly the same details don’t match over different accounts then this can cause errors. Make sure they all match; even slight differences are enough to cause an error.
All accounts must be listed on your report and your payment history should be correct. Any incorrect information should be removed or amended as soon as possible. It can take up to six weeks to be updated and a simple mistake or piece of out-dated information could be preventing your credit approval.
Fix any areas that let you down
Your report will highlight the areas that are letting you down. Find out what they are and see if there are ways of improving them. This is your best guide to improving your score. Find the problem areas and fix them.
Make sure you’re on the electoral register
The personal details on your credit report are checked against the electoral roll specifically that you live where you say you do. If you’re not on the electoral roll then register to vote. It’s as simple a fix as that.
Pay your bills on time
Paying your bills on time shows lenders that you are a responsible borrower. Set up direct debits and make sure there’s always enough money to cover your outgoings. This is one of the primary categories reviewed by the credit bureaus. It accounts for around 35% of your score. Even payments that are only a day or two late can impact your score so it’s imperative you adhere to a good routine.
Alternatively you could consider one of the many budgeting apps available? They’re created to help and guide you through all of your financial movements and repayments.
Always pay more than the minimum amount
If you only pay the minimum, or less, on your credit card balances it suggests to future lenders that you are living at the limit of your financial means. Continually paying more than the minimum will also help you pay off your balances faster. Showing lenders you can pay off your credit card balances in full shows that you’re in complete control of your finances.
Have a good mixture of debt types
Research from FICO suggests mixed credit type borrowers are less of a risk that those who carry only a single form of credit.
If you can show responsibility in repaying a mortgage, a credit card, a personal loan and a store card, it shows good money management over a range of loan types and more rounded financial behaviour.
Limit your credit applications
When you apply for new credit the lender carries out what is known as a hard search. Each credit application affects your report so the greater amount of unsuccessful applications you make suggest a struggle to gain credit. Every application will cause a slight drop in your score that you can bring back up with responsible usage. Spread out your applications in order to not look desperate.
Consider using a credit application calculator before making your full application. This will give you a much better idea of which applications will be successful and less damaging to your credit score.
Limit your amount of available credit
For a healthy credit score you should avoid living at the edge of your credit means. Try and keep your usage below 50% of your available limit. Don’t give new lenders the impression that you are totally dependent on credit but that you are comfortably living within your means.
Keep your credit cards
Even if you’re not using them keep your credit cards open. Your credit history accounts for part of your credit score and will be averaged over all of your credit facilities. Keeping cards open that you have held for a long time can add up to a greater history than if you cancel them and removing them from your report. Just make sure those you aren’t being charged an annual fee on those not in use.
Use a credit builder credit card
For those with a poor or with no credit rating using a credit builder credit card is one option to start building your credit report. These cards will offer a high rate of interest so avoid them if you really need to borrow. However, if you pay the total balance each month it will cost you nothing and the benefits to your report will show that you are a responsible credit user and begin the building of a healthy score.
Disassociate from poor credit associations
If you have shared a joint credit facility with someone holding a poor credit score in the past then you should apply to the credit agencies to remove the association as long as it’s no longer active. A lender may reference their report when you make a new application and this can affect your score. This applies to joint loans and mortgages but can also apply to a variety of other services.
Use your rent payments to boost your score
If you make regular and responsible rent payments you can utilise them to show responsible behaviour on your credit report. A free scheme called the Rental Exchange collects rent payments and passes them to landlords and letting agents. They also pass the payment information to Experian making them aware of your payment behaviour. It’s a good alternative to help boost the credit scores of those who don’t hold a mortgage but can show responsible financial behaviour towards the cost of their home.