A guide to understanding your credit scoreDisclosure: This post contains affiliate links & I may earn commission if you make a purchase. As an Amazon Associate I earn from qualifying purchases.
Credit scores can be confusing and stressful, here's an all you need to know guide to get your free report, learn what your score means and find easy ways to improve it.
To get any sort of 'credit' including loans, mortgages, overdrafts, credit cards, contract mobile phones or even monthly car insurance, lenders use a scoring system to predict your likely-hood to pay.
What is Credit Scoring?
Scoring systems differ from lender-to-lender, and product-to-product and no one really knows exactly what each lender looks at and uses to judge. So just because one company may have rejected you, does not automatically mean another one will and the same goes for an acceptance.
You might think your score is good and have had one lender say 'yes' and then get rejected by another, this could be due to many factors including over applying, reaching your 'available' credit limit and of course the particular lender having different criteria.
Credit scoring doesn't just dictate what products you'll receive, but also how good the ones you actually get are. For example, most loan rates are 'typical', meaning the APR depends on your credit score; with credit cards, if your score's too low for the deal you wanted, you might get accepted but sent/offered a different product.
Credit company's use a variety of information to make their decision whether to lend to you, including data held by three companies known as 'credit reference agencies' Experian, Equifax, and Callcredit.
11 Steps to Increase & Protect your Credit Score & Ratings
1 - Periodically check your credit file for errors
If possible, check all three agencies. While doing a check is recorded on your file, it does not add a 'credit search' that a lender can see. It's worth checking because a simple error could cause you a problem. It is a good idea to do a check-up roughly every 1-2 years and always do one just before making any important applications such as mortgages.
2 - You must have credit to have a Credit History
If you haven't had credit before then you will obviously won't have 'good' credit, so if this is your first credit card, then you might have to get one of the beginner cards such as the Capital One Classic which is much easier to obtain.
3 - Manage your accounts properly
Accounts with a lot of history of good usage will score higher, as with credit scoring, good account management history matters. Although too many cards can also be negative, try not to have more than 6 active credit cards at any one time and close any dormant cards you may have.
4 - DON'T MISS PAYMENTS!
Don't be late - Period - Manage your monthly payments, use direct debits and standing orders, if in doubt pay early, as if you're seen to be a constant bad payer you won't be offered any credit.
5 - Have a spread of account types
Such as an overdraft, current account, credit cards, a mortgage, and loans.
6 - Time your applications correctly
The notes left on your file when you apply for things, in a short space of time hurt your score. Space out applications, not just for credit but for car insurance, mobile phones, and others, as all can leave searches on your file. Moving house also disrupts a score, so make important applications pre-moving. Plus, you will score better when you're earning, so if you're about to take time off, go on maternity leave or suspect potential redundancy, apply beforehand - You should never lie on applications.
7 - Read and understand your cards Terms & Conditions
So as you are not hit by a charge out of the blue i.e. some cards may require you to spend at least £500 over a 12 month period etc.
8 -Beware of mass marketing tricks
In truth, being "pre-approved" or "pre-selected" for credit is a waste of time. This marketing trick is most generally used by companies looking for people who will be easily beguiled by the glossy literature with dazzling headline rates and are not too inclined to read the small print. Worst case scenario, being on the lists of marketers who mass-mail this sort of material can be trouble because the ready-completed forms can be sent to old addresses from out-of-date databases and leave people open to identity theft, as fraudsters scoop up the junk mail in communal halls and waste bins. If you think you might be at risk in this way, contact the Mailing Preference Service (mpsonline.org.uk) and get your name taken off the mailing list.
9 - Get yourself on the electoral roll
If you're not on the roll, it's unlikely you will get any credit, so sign up immediately. You don't need to wait for the annual reminder, you can sign the register at any time on the Gov.uk Website. You can also use this to ensure your information is correct.
10 - Evidence of stability
Home owners rather than renters, and those who are employed, rather than self-employed, tend to be more appealing. Putting a landline number rather than a mobile number on application forms can help with security checks and improve your chances. Being with the same employer, bank and current address for longer will all help too.
11 - Check the address on all active accounts
You may not have used your old mobile contract or credit card for five years, but if the account is still listed as open and you had a different address this can hinder applications due to ID checks.
Lenders are not obliged to give out credit.
Universal credit 'ratings' and 'blacklists' do not exist
Unfortunate truths about money lenders
Even good risks can be rejected just because they will not make the bank enough money.
It is all about sophisticated customer weeding (the whole process is about lenders picking their perfect customers)
Credit card companies may reject you for always repaying cards in full.
It's all about how financially attractive you are.
Credit scoring's about profit, not risk.
***Rent payments can go on your credit files from winter 2013***
Rent payments could appear on your credit file. This was delayed into winter 2013. This means whether you're on time or late paying rent, it could start to affect your ability to get credit. This won't automatically be in your rental agreements, the landlords would have to insert it and get you to resign before they can start doing this and for the moment it is only for the private rented market, in a separate section to any mortgage, loan or credit card history.
Landlords will be able to see your rent-paying history to judge you as a potential tenant, but not the rest of your file, including credit card and loan information.
Putting things right...
There are a few leading credit report websites that offer free 30 day trials including:
But more recently some major credit report websites are offering completely FREE for life credit reports that are updated every 30 days, including:
Credit Karma (formerly Noddle)
Dealing with all the default notices on your file
One of the main problems people face are past debt defaults on your file, these can easily hamper most applications to get new credit and if they are genuine. Defaults stay on your credit file for six solid years from the date the default was documented and there's nothing you can do about them.
After the period, it will automatically be deleted from your credit report, whether it has been paid, satisfied or not. Was the default unjust? There are a few things you can do if the default is unfair.
Complain to the Ombudsman
Firstly write to the company and complain that the default isn't fair. Ask for it to wiped from your file. If that fails, complain to the Financial Ombudsman the free independent arbiter of disputes, it can rule both that the debt is unfair and that the default can be wiped.
Negotiate with the lender
Are you prepared to settle the debt? either in part or in full? then you can enter a negotiation with the company you owe the money to. You can make it a condition of settlement that the default is wiped off your credit file. Companies are allowed to do this for disputed defaults
Add a 'Notice of Correction'
If all else fails, and you believe the default's justifiably unfair, you can add a notice of correction to the file explaining the problem eg, saying: "It was a joint account and the debt was run up once I no longer had access by an ex-husband/wife." This will, of course, slow down any application because then the companies will have to look at the application manually, but as a substantial default is likely to stop you from getting credit anyway, that is usually not a problem, providing it helps.
The Experian Credit Score gives you an idea of how lenders may view you. It reflects your credit history, which companies look at to help them decide if you’re a reliable borrower. You can check your score for free – the higher it is, the better your chances of borrowing money at the best rates. It’s based on your financial behaviour, so you have the power to change it.
Protecting Your Score
There's inevitably going to time times when you need to apply for a loan or a credit card, just remember to utilise all the free tools out there such as online price comparison tables to get a feel for potential loan companies APRs
You should also, ideally only apply to lenders that allow soft searches prior to applying, as these do not affect your credit score, although it will be recorded on your file like every other search, lenders can't see it, so it won't affect their decision.
You can also use loan comparison websites such as MoneySuperMarket.com that provides a great free 'Loan Eligibility Checker' which performs only soft searches so you can see a variety of loans available and the APRs that you're likely to be accepted for.
And as always, if you have any other fool-proof ways to improve your credit score, please let us know in the comments below...