A good credit score can help boost your chances of being approved for the best credit cards, loans and mortgages, and at the best interest rates. But, how can you build your credit score in the UK? Well, first we need to know the answer to the question, “what is a credit score?”
The Experian credit score website gives us insight into this question. Essentially it’s a metric score based upon your personal habits. It shows lenders and financial companies whether you are suitable for a product that you may wish to apply for. These products range from mortgages to credit card applications and loans. I’m going to really look into some of my top tips to improve your credit score in the UK.
Building your credit score is not something that happens overnight, it’s more a result of good financial housekeeping. That being said, there are a few things that can you can do now to influence your credit rating. Working through the steps will begin to change a lenders’ view of your personal finance quality and start you on the road to building a good UK credit score.
Keep your credit file up to date
This is my favourite tip. It’s like the buzz you get when you’ve cleaned your house (No, just me?). In a similar way to cancelling no longer needed direct debits, you’ll feel the benefits of a streamlined and organised financial situation quickly. Keeping your credit file up to date shows lenders how organised and stable you are. It gives the impression of a well-informed individual. Be consistent with clearing errors and updating/cancelling items when needed. Checking your report regularly using companies like ClearScore or Experian are good practice. Note however that some companies charge for this and therefore I recommend ClearScore who are free if you just want a quick glimpse. Alternatively, searching the MSE website for the Money Saving Expert Credit Club will lead you to a link allowing access to a full Experian credit report for FREE each month. Use them to go through all your current financial accounts and check addresses to make sure they’re all up to date. this is particularly important after a house move or other large changes in your finances and living arrangements.
Manage your percentage of credit used versus total credit availability
Think about a Loan to Value on a mortgage application. Large percentages credit in a loan means worse rates and less chance of getting the product you need. The same is kind of true with credit allowances for your cards. If you have a credit limit of £2000, don’t use it all. Try and keep your percentages as low as possible ideally below 25%, and certainly below 50%. If you creep up over this amount it will have a negative impact on your credit file.
Should I withdraw cash on my credit card?
No, never… ever! This will certainly look like bad money management to any potential lenders. It can also, potentially, be catastrophic for any promotional periods or introductory offers on balance transfer and interest-free credit cards. Often hidden away in the terms and conditions of a credit card agreement is the clause stating you’ll give up the best rates on your card if you withdraw cash or fail to meet your minimum payments.
How do I correct errors on my credit report?
Correct mistakes or faulty information on your credit report as soon as you can. This is particularly important if you are separating from your spouse or partner and have linked accounts such as mortgages and joint accounts. All mistakes can have a big impact on your credit score in the UK. I had a credit account for a store chain opened in my teenage years and hadn’t realised that it was still on my file until later when I checked my credit file, despite the fact it was closed for years. This, temporarily at least, negatively affected my score. You can raise a dispute using the Equifax service and they will investigate the error and get back to you with their findings.
Use a credit card for small regular purchases
Spending money generates a financial footprint. If you have a credit card, using it for small regular purchases, say for example to pay for a monthly gym membership, is useful. The aim is not to rack up a large amount of debt, but instead to show that you can use responsibly a small amount of your credit allowance, with restraint. By doing this it will allow you to see a small monthly spend on your credit card statement at the end of each month. The small amount means it should be paid off easily generating a positive payment footprint on your credit score file.
Remember to keep track of what your payment will be at the end of the month and to be sure that you have enough money in your normal debit account to pay this off. Make sure to set up a Direct Debit to pay the full balance every month on your credit card where possible. By doing this you won’t miss any payments and you will avoid getting into a debt that’s not manageable.
Should I spread out credit applications?
Simply put, yes! If you are repeatedly applying for credit accounts with companies such as the Next Directory or Very.co.uk alongside credit card applications and other similar products this will lower your score. Particularly if you are applying for them within a very short space of time. It lowers your credit score in the UK because each credit account application leaves an obvious mark on your credit file and UK credit report.
These hard searches are the worst things to hit your file repeatedly. They are best saved, if you must make them, until after applications for financial items you really need, such as successful mortgage applications. Using a credit eligibility checker, such as the one on the Money Saving Expert website, is a great way to see you can be accepted before you apply. These “soft searches” not only save you time on wasted applications but also have no impact on your credit score in the UK.
Should I cancel unused cards and financial accounts?
In most cases, it is best to cancel unused credit cards. Too much available credit that isn’t used looks a bit suspect and may affect your credit score in the UK. That being said if you have a long-standing account that you’ve always made good payments on it may be worth keeping it as this data can be lost once the account is removed along with some of the credit score value. It’s a little bit hard to judge what is the right amount to keep open. However, if you have enough credit to buy a new house, you may be pushing your luck! Coincidentally the BBC Money Box podcast has some great tips on how to manage a UK credit score.
How to get on the electoral roll and why it is important
The electoral register is sometimes referred to as the “electoral roll”. It is essential in providing a good financial identity. It shows who you are, where you lived, and links to your financial dealings at different properties throughout your lifetime. You can find out more about it at the GOV.uk site
Should I pay off my debts with savings?
Some debts such as student loans have special rules, but in general paying off debts will not only give you more money in the long term it will also help to build your credit score in the UK. You can read more about whether a student loan affects your credit rating in my other articles. Most lenders can see on your file how much debt you have. Having too much will result in them being reluctant to lend to you due to you being a financial risk.
On the flip side, keeping saving to place as a deposit on a house is equally important to keep your LTV (Loan to Value) down. Therefore, if you’re thinking about applying for a mortgage keep your savings for a bigger deposit. Then, once you’ve got your mortgage, pay off your debts via overpayments where possible to bring the debt down again. Be wary of ERC (Early Repayment Charges) on some mortgages though.
The most important, always a must, never forget rule – always pay your bills on time
Whether it’s your mobile bill, finance on a car, or your minimum credit card payment – never miss a payment! It literally shows up as a red or orange marker on your credit file (RAG rating) and then requires you to do more positive financial jiggery-pokery in order to build up your credit score again in the UK.