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Whenever you take out any form of credit, whether that’s a credit card, bank loan, car finance or mortgage, the information about your borrowing is recorded by different credit reference agencies. Your lenders report to these agencies and let them know if you’re making all of your payments on time or if you run into difficulties. All of this information gets stored in what is often called your credit file. This file can then be checked by other lenders when you make applications for other loans or mortgages.
There are three main credit reference agencies in the UK - Experian, Equifax and TransUnion. Each agency has its own way of recording your information and using it to calculate a credit score or credit rating. They will look not just at whether you have things like late or missed payments, but also whether or not you’re on the electoral register, what percentage of your credit facilities you’re using, and how many different forms of credit you have.
The different agencies also each have different scales, so a score of 600 might represent a good score with one agency, but a poor score with another. This can make it even more confusing to try to work out how your credit rating works and what you need to do about it.
If you don’t want to go to all three agencies separately to try and get a handle on your credit score, you could use a service like checkmyfile. Checkmyfile takes information from all three sources, as well as public data from Crediva, and gives you a comprehensive view of where you stand and what issues might be affecting your credit rating. Checkmyfile does have a monthly fee attached however. If you’re looking for something without a cost, then we offer a free credit report service. We can also help you find a poor credit mortgage if this is something you need.
You might be wondering what all the fuss is about when it comes to credit scores, and why it’s important to worry about trying to improve your credit rating. The reality is that your score can have a big impact on your finances and can determine whether or not you’re accepted for credit in the future. This includes mortgages, so if you dream of owning your own home one day then it’s important to build up a good credit score.
When you make an application for a loan or a credit card, a lender has to decide whether or not to say yes. They do this by trying to work out if you’re a safe pair of hands - do you have the money coming in every month to cover the repayments for example, and is your employment stable? Another way they assess your application is by looking at your credit files. If they see you have a history of making repayments on time then they are more likely to look favourably on your application than if you have missed payments in the past or had more serious credit issues like defaults, county court judgments (CCJs), or an individual voluntary arrangement (IVA).
It is possible to get a mortgage with bad credit, but it’s more difficult and you often end up paying a higher rate of interest or needing to put down a larger deposit. It makes more sense to work on improving your credit rating before making your mortgage application.
Fortunately a bad credit rating isn’t something that has to follow you for life - there are steps that you can take to boost a poor credit score and improve your general financial management skills.
It's also worth remembering that issues don’t stay on your file indefinitely. Your credit file only goes back six years, so any defaults, late payments or other issues that occurred more than six years ago will come off your record and not be seen by potential lenders. This includes debts that remain unpaid.
If you do have a significant issue that you’re worried is going to mean you’ll get a mortgage application declined, then one option is simply to wait until it comes off your record and in the meantime keep saving for your deposit.
If you want to be a bit more proactive about improving your credit rating though, there are plenty of actions you can take.
Let’s take a look at each of these ideas in turn to see how they can help you get a better credit rating.
Many people assume that the information held about them by credit reference agencies is guaranteed to be accurate, but unfortunately that’s not the case. Mistakes can happen, so your first step should be to double-check that everything recorded is correct, and that you aren’t being penalised unnecessarily. If you spot something that you don’t think is right, you can contact both the agency and the lender to rectify the mistake.
You may also be able to add notes to your file if you feel that there is a situation that could benefit from some context.
For example, if you had a period of illness or an accident that meant you were temporarily unable to keep up with payments on a loan, you can request that a note explaining this is added to your report. Notes can be up to 200 words long and are known as a Notice of Correction.
Making sure that you’re on the electoral roll is a quick and easy way to prove your address and boost your credit rating. You can get on the electoral register via the Government website. It also helps if you have lived in the same place for a good period of time, so avoiding frequent moves is a good idea if possible.
This sounds obvious, but some people don’t realise that even just being late for a single payment on a credit card can have an adverse effect on your credit score. If you are worried that you’re going to miss a payment, contact your lender in advance of the payment due date to see if you can make an arrangement to pay a lower amount. The very worst thing you can do is ignore the issue and hope it won’t matter - it will.
Your credit utilisation ratio is the amount of credit you are using, as a percentage of the amount you are able to borrow. For example, if you have one credit card with a credit limit of £2,000 and you currently have a balance of £400, your credit utilisation ratio would be 20%.
Lenders prefer to see low credit utilisation ratios as this is a sign of responsible borrowing. ‘Maxing out’ credit cards can give the impression that you might be a reckless spender or unable to manage your credit facility well. Try to get the percentage down - ideally to below 30% - and this should help to boost your credit score.
Every time you apply for credit and a lender runs a search on your credit file, this can knock down your credit score. If you make an application that’s declined, this can have even more of an impact. If you know you want to improve your credit score, it’s good to avoid anything that could trigger a search.
It’s worth noting that checking your own credit report does not impact your credit rating in the same way as if other people check it. You can look at your own credit history as often as you like, through as many agencies as you like, and your score will remain unchanged.
Similarly, don’t be tempted to start cancelling credit cards thinking that will help your score. Lenders like to see well-established credit accounts, as this shows consistency and reliability. If you’re worried about inactivity on credit cards, you could start using them for a specific item, such as grocery shopping, and then paying them off in full at the end of every month.
If you have linked finances, for example a joint loan with a partner, it’s not just your credit history that comes into play - their finances will be connected to yours as well. If they have had their own credit issues in the past then this could have a knock-on effect on your rating and, as unfair as it feels, your score could be lower as a result.
If this sounds familiar, then the best thing to do is to end these links wherever possible. It’s not always easy to break financial connections with someone, but it could have a positive impact on your credit rating if you can.
While you might think that having no credit at all would equate to a high credit score, it’s actually not the case. If you’ve been resisting taking out a loan or cards for this reason, then you may have been doing yourself a disservice. Having some credit and managing it well is actually a good way to show lenders that you are a responsible borrower as it provides evidence of your being able to make payments on time.
If you’re not eligible to take out a regular credit card, you could consider a credit-builder credit card, designed especially for people with bad credit or a low income. They tend to have low limits and high interest rates, so they’re not cheap, but ideally you’ll be using them moderately and paying in full every month, so won’t be affected by the rate.
Typically credit reference agencies only hold information about credit accounts like loans and mortgages, but it is sometimes possible to add additional information to try and show your creditworthiness. Experian has set up the Rental Exchange, a scheme designed to tackle inequalities between homeowners and tenants, that does just this.
As part of the scheme, tenants can ask their landlords to submit details of their rental payments to Experian, who can then use this information to enhance your credit rating. Only do this of course if you are confident about paying your rent on time every month.
If the idea of having other non-credit payments recorded on your credit profile appeals, then you might want to give Experian Boost a try. It works in a similar way to the Rental Exchange, but has a much broader remit. Experian uses Open Banking, (with your full consent), to pull in information from your day-to-day banking, so things like council tax payments and subscription services like Spotify and Netflix can be included.
While these aren’t debts in the same way that a loan or credit card is, they can still show that you’re able to maintain a regular monthly payment and are therefore evidence of responsible financial behaviour.
We hope that this has given you some ideas for positive actions that you can take now to improve your credit score. Get in touch for a free credit report to start your journey. If you’re concerned about how your financial history might affect your ability to get a mortgage we can also help you secure a bad credit mortgage or offer support as you rebuild your score.
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