Don’t mind paying tens of thousands of pounds more than you have to over your life? Then don’t read this.
Credit scores: not fun, not sexy, definitely not easy to understand, but, they are pretty damn important. You may be struggling to care about yours right now, and I don’t blame you, but if you ever want a chance to buy a house, unfortunately they’re one of those things you can’t ignore, no matter how much you may want to, much like laundry, your boss and Donald Trump.
So, we’ve broken down the key things that you need to know.
What is a credit score?
It is essentially a measure of how likely a lender thinks you are to repay money borrowed. It predicts this based on a number of things, the main one being your previous credit payment history. People often assume that they have one, all-encompassing, credit score, but that is not the case. You are scored differently by each lender. They will, however, all look at your same credit file (compiled by credit reference agencies), in addition to any previous dealings they have had with you (and, of course, your application for whatever financial product you are approaching them for).
Why do I, or should I, care about mine?
Your credit score affects your finances in many ways.
Firstly, let’s consider loans. Your credit score can determine not only whether someone will lend you money, but at what rate. If the lender thinks you are high risk, you may be offered that loan (happy days) but well be charged a higher rate of interest (kind of takes the shine off it a bit, doesn’t it?).
Mortgages are loans (and yes, I know that you know that) and so a poor credit score could mean no mortgage and, therefore, no house. That’s pretty serious stuff! With the current economical situation putting getting a foot on the property ladder out of reach for so many anyway, don’t make things harder for yourself by letting your credit score stand in the way of that dream pad.
Want that fancy new iPhone free on contract? Well, tough; if you have a poor credit score that is. It’s sticking with Pay As You Go for you, then.
If you’re applying for a new credit card, your credit score can be important in determining not only whether you are given one, but your APR and whether you are offered any promotions.
How to improve your credit score
Phew, that is the technical stuff out the way. So, are you convinced that you should care about your credit score yet? If so, here are a few tips on how to improve it:
1. Don’t be late with payments.
I know, I know, this is obvious. However, it would be ridiculous not to include it in this list, given that it’s so very important. You may also be surprised at the consequences of just one or two late or missed payments. Setting up direct debits is the easiest way to ensure this doesn’t happen. Plus, it requires no effort from you (always a bonus) and you can’t forget.
2. Register to vote.
If you’re not on the electoral roll, you are unlikely to be given credit. Whilst the credit reference agencies do use the full register which everyone is on, by law, the electoral roll is often also used when determining credit scores. Even if it isn’t, as lenders also use it to help check your details, not being on it could cause you delays when applying for credit.
3. Get a credit rebuild card.
If you have a poor credit history, getting credit is difficult. However, you need to start building a good recent credit history, which obviously involves getting credit, in order to improve your credit score and be offered more credit in future. Tricky. Credit rebuild cards are a good solution here, as long as you use them correctly (otherwise they are a complete nightmare, so take note). They are available for those with a poor credit history but have ridiculously high rates of APR. However, you won’t be charged interest if you never use the card to withdraw cash and pay it off in full each month. Over time, this should improve your credit score.
4. Don’t do too many applications all at once.
If you’re anything like me, you’ll leave all “life admin” tasks for as long as you possibly can and then try and do everything all in one go – lurching from being horribly inefficient to smugly on top of things (briefly). This is not a good idea with applications for credit as every time you apply for any kind of credit, it is noted on your file for a year. If there are too many then lenders may think you are desperate for credit, leading to rejections.
5. If you do get rejected, check your credit file before applying elsewhere.
Simply applying again leads to more searches for credit which are, again, noted on your credit file and can lead to more rejections, prompting a tedious, and damaging, cycle of applications and rejections. The lender should tell you which credit reference agency it used, so contact that one. You have the legal right to see a copy of your credit report for £2. If you find an unfair default on your file, dispute it. Failing to do so could result in continued rejections for credit. Then also check whether the other two credit agencies have the same default listed too.
6. Cancel store and credit cards you no longer use.
Lender sometimes view you having access to too much available credit as a problem, even if you are not using it. However, if you have any long-term bank accounts which you haven’t defaulted on, these can be good for your credit score (I did say in the intro that credit scores aren’t easy to understand…), so maybe keep a couple of those open, but not too many. It’s a tricky balancing act, as with most things in life!