Almost 75% of Brits don’t know their credit score according to a YouGov poll, while almost half of those surveyed have never tried to find out.
If you’re guilty of this indifference when the time comes to seek a loan, your application could be tarnished by a bad credit score you didn’t even know you had. If you desperately need to borrow money, this is the worst time to find out.
Luckily, you can get to grips with your financial situation in advance by checking your credit report for free online. If it turns out you have a low rating, you can use this insight to help you plan how to improve it before your next loan or credit card application.
Why do I have a bad credit score?
The most obvious reason for a bad credit score is having a poor credit history. If you’re guilty of making late payments or missing them altogether, this will do serious damage to your score. Other dangerous habits include going over your credit limit, and failing to pay off any significant existing debts. All these factors could suggest to lenders that you are struggling to manage your money and your rating will plummet accordingly.
There can also be some more extreme situations that have a lasting impact on your credit score like receiving a County Court Judgment (CCJ), where a court rules that you owe money to a lender. Declaring bankruptcy or entering an Individual Voluntary Arrangement—a legally binding form of insolvency where you pledge to pay back your debts over a period of time—can also be detrimental. All these examples stay on your credit report for at least six years.
However, you may be surprised to learn that having nocredit history at all can also be bad news. As lenders have no evidence of your borrowing habits, they are likely to see you as a potentially risky applicant. If you’re financially tied to anyone with a poor credit rating, that could drag your own score down as well.
What steps can I take to boost my credit rating?
The first step in improving your credit score is to resolve any of the issues outlined above. If you have been issued with a CCJ, this won’t appear on your credit report provided you pay off the debt within a month. You should also avoid spending more than your credit limit, and cut financial ties with anybody having a negative effect on your rating.
As well as tackling these problems, the following tactics will also help boost your rating:
1. Apply for a credit-building product
Getting a new credit card can be scary when you have a bad credit score, but as using credit is the only way to get credit, you’ll never boost your rating without one. Unfortunately, a poor score can make it hard to obtain a credit card in the first place. However, there are many specifically designed accounts to help you rebuild your credit history.
These cards typically have very low credit limits and high-interest rates, meaning it’s best to pay the balance in full to avoid hefty fees. The terms reflect the low trust lenders have in you based on your current credit score, but sensible use will prove that you are responsible, and can, therefore, help to improve it.
2. Set up direct debits for your credit card payments
If you often forget to pay your bills on time—or at all—you should consider setting up direct debits to eliminate the risk of missing a payment. As well as sparing you from late fees, this will also prove that you can be trusted to make repayments and is great news for your credit score.
Direct debits give you the option to pay the full balance, a fixed sum, or the minimum required on a regular schedule. It may be tempting to select the lowest option, but paying the full amount is always recommended. Though it’s commonly thought that carrying a small balance over benefits your credit score, this is not true—all this does is leave you with interest fees to pay.
3. Keep your credit usage as low as possible
Do you tend to max out your credit cards? If you’re hoping to improve your rating, it may be time to break the habit, as the proportion of credit you use can have significant effects on your score. A report by Which? revealed that keeping your balance below 30% of your limit can add 90 points to it. On the other hand, going above 90% has the potential to cost you 50 points.
This is important, as lenders look at how much available credit you have left, as well as any outstanding balances. If you regularly use almost all your credit, this perceived reliance on borrowed money could put lenders off. Staying under 30% of your limit is ideal, but if that’s still too difficult, try to make sure that you don’t go above 50%.
4. Thoroughly check the details of your credit report
A poor credit score could come as a huge surprise if you aren’t guilty of any of the bad habits described above. In some cases, a low rating may result from an error on your credit report, so be sure to give it the once-over every year to ensure all the information is accurate and up to date.
Most errors are likely to be innocent mistakes—your file might have been mixed up with somebody else’s if they have a similar name, for example. However, some errors could signpost fraudulent entries, where someone else has tried to obtain credit using your name. It’s vital that you correct these as soon as possible by contacting either the company that provided the incorrect information, or the credit rating agency.
5. Get on the electoral register
A simple but worthwhile way of improving your credit score is by enrolling yourself on the electoral register. At first glance, this might seem irrelevant, but confirming that all the personal details in your application are correct will actually help lenders. Being able to verify your information means they can rule out the possibility of identity theft or fraud, which therefore makes you a less risky borrower.
You can check whether you’re registered by contacting your local Electoral Registration Officer. Details of your local authority can be found here, and if you’re not registered, you can do so via the GOV.UK website.
What can I do if I’m refused credit?
The worst thing you can do is apply for another credit card or loan straight away. If lenders see multiple applications on your credit report in a short space of time, they’ll sense desperation and be far less likely to provide cash. This may further damage your credit rating and affect the interest rates you’re given if your application is accepted.
While continuing to build your credit score, you can still explore some alternative borrowing options. You could contact a credit union, a non-profit organisation which allows members to borrow from pooled savings. Bear in mind that some are unwilling to lend to new members of the group straight away. Alternatively, you could see if you’re eligible for a budgeting loan, provided you’ve been on certain benefits for six months before applying.
A simple solution is to take out a guarantor loan, which is much more affordable than a payday loan, and one you can apply for even with a bad credit score. All you need is a guarantor, such as a friend or family member, who will be willing to make the loan repayments if you don’t. According to Amigo Loans, this doesn’t affect the guarantor if you keep up repayments, and won’t leave a footprint on their credit file or affect their own score.
While it can take months or even years to see significant improvements to your credit rating, always use eligibility tools, like MoneySuperMarket, before applying for any loans or credit cards in the future. These use your data to run a “soft-check”, which won’t be reported to credit rating agencies and can warn you in advance whether your application is likely to be accepted or rejected.
