A person with a poor credit score, or no credit at all for that matter, will struggle when it comes to applying for any type of credit. Whether it is a personal loan you are looking for, or you might be looking at putting in an application for a mortgage to buy a house or apartment to call your own, if you have a bad credit score you will struggle to be successful.
There are certain routes you can go down if you do have a bad credit history, such as taking out financial products that accept adverse credit scores and allow you to build up your credit score, and alongside these, there are a range of things that you can do to help build a good credit score over time and to slowly move away from poor credit that is affecting your life.
Is there a difference between a credit score and a credit file?
You might be looking at this and wondering why you’ve seen two different terms used before – ‘credit file’ and ‘credit score’. Is there a difference between the two and does it help you with a bad credit score to understand?
One of the best ways to move forward with a positive outlook when you have a bad credit score is to understand what everything means and how to move forward positively. With that in mind, it certainly helps to know the difference between the two.
Credit file – your credit file shows the history of your personal financial behavior. It is the report that the various credit agencies update on a continuous basis, and contains information from both public and private records, including electoral roll information, information shared with different lenders, and how responsible you’ve been as a borrower over the years. The information in your credit file proves you are who you say you are, shows all of your past borrowings, and how you’ve acted in terms of making payments on time and in full.
Credit score – each credit agency comes up with its own score criteria, taking all the information that is held in your credit file and putting it together to come up with your specific credit score. A lender will look at each agency and each credit score and see the average to get a clear picture of what you are like as a borrower.
Why is it important to have a good credit score?
Whenever you apply for credit of any kind the lender will look at your credit history and credit score and decide whether you are a safe bet to lend to. This is based on information from your credit file, the details linked to your application, and all other data they hold on you if you are a previous or existing customer. Each credit agency will have a different credit score for you, this is natural. The four main agencies in the UK are Equifax, TransUnion, Experian, and Crediva.
A higher credit score is desirable as it means that lenders will see you as a lower risk and are therefore more likely to approve you for credit. A high credit score demonstrates that you have a good history of responsibly managing your credit repayments on time. A good credit score will give you a better chance of securing credit, at potentially lower interest rates, and with higher credit limits for you to use.
Does it take long to improve your credit score?
This is a question that can only really be answered for each individual case. Every person is different, but one thing’s for certain, your credit score won’t improve dramatically overnight. Even little changes, like updating your address, new bank account information, or new credit card information, can take several weeks to update on each credit file. Paying your accounts regularly, on time, and keeping things active are things that you can do to impact your credit score on a consistent basis and keep things moving in a positive motion. On the other end of the spectrum, any missed payments or defaults will reduce in impact over time and be deleted from your credit files altogether after six years.
10 Tips to improve your credit score
As you can see, your credit score is important, so it goes without saying that you must think about ways to improve a poor credit score and get it to a place where it doesn’t negatively impact your ability to acquire new credit as and when you need it. Here are some tips to help you improve a poor credit score.
- Make sure you’re on the electoral roll – this is something that might not seem obvious at first, but if you are not registered to vote, or you haven’t changed your address on the electoral roll since you last moved property, this can have a negative impact on your credit score. Whether you live alone, with your parents, or in a shared house, it is important to be on the electoral roll, as it helps to prove who you are during a credit application.
- Think long-term – if you have no credit history or a poor credit score, you need to think about building a good credit score as a long-term journey. Following a few steps will help you to be methodical, and to be consistent, which is a character trait that lenders are looking for in borrowers.
- Don’t apply for too much credit – applying for multiple credit applications in a short space of time is a red flag to lenders, especially if you have been rejected for applications and tried again soon after. It puts you in the high-risk category, so only look to borrow what you know you’ll be accepted for and that you can afford to pay back.
- Always make payments on time – the biggest thing you can do to improve your credit score is to ensure that you pay your accounts on time every single month. If you can pay in full then great, but if you can’t afford to fully pay off your balance, always look to pay more than the minimum suggested payment to pay things off quicker.
- Think about the percentage of borrowing – your credit utilization is the percentage of your credit limit that you use. A lower percentage is seen as a positive by prospective lenders and is more likely to increase your credit score as a result. For consistent improvements in your credit score, aim for around 30% and below credit utilization.
- Management of multiple accounts – if you can demonstrate that you have successfully managed payments on multiple credit accounts over a long period of time it helps you to improve your poor credit score into a good, solid credit score.
- Be clever in building credit – there are certain credit cards that are designed to help you rebuild your credit score. You can use these, with typically low spending limits and high-interest rates to build confidence in you as a borrower. This could be used to pay for your petrol every month or to pay for groceries. As long as you pay it all off in full by the end of the month this will help you to build a good score.
- Try not to move home too often – this isn’t always possible of course, but if you move home every year, it can be viewed by a lender that you might be having problems paying the rent. Stability in your home life, like stability in regular payments, paints a better picture of your credit health.
- Check for errors on your credit file – you have the right to view your credit file with all of the credit agencies and to let them know if there are any inaccuracies that you wish to rectify. It could be as small a mistake as an address mistyped, or your name being one letter wrong, but these can have a big impact on your credit report. If you do see something, contact the agency directly and ask them to add a Notice of Correction to your credit file.
- Be proactive if you’ve been a victim of fraud – if you have been a victim of credit fraud you might be worried that your credit score might be impacted. When you check your credit file for inaccuracies, look for a ‘Victim of impersonation’ notice that is provided by Cifas (a not-for-profit fraud prevention service) and placed by lenders on activity where they believe fraud has taken place. The marker will stay on your file for 13 months and doesn’t affect your credit score but might cause a problem where credit applications are processed automatically.
Following these 10 tips and understanding what your credit file and credit score are will go some way to helping you improve a poor credit score and build a brighter financial future.