Understand your grade
Before you start thinking about how to improve your credit rating, it’s important to understand exactly what it is and how it’s used.
Banks and other lenders look at your credit score when deciding whether or not to accept a request to borrow money – this could be in the form of a loan or a credit card, or if you buy a new mobile phone contract.
There are three main credit reference agencies in the UK: Experian, Equifax and TransUnion. They hold data about your financial history, such as debts you already have, known as a credit report.
This report is then used to generate a score to show your creditworthiness. Each referral agency has its own numbering system, but the higher the score, the better, and the more likely you are to have your loan application accepted.
Your score can also impact the amount of money you can borrow and the interest rate you are charged.
Read the report each credit reference agency has on you to make sure it’s correct, as mistakes could lower your score.
They usually offer several ways, free and paid, to verify your file. You can go to their website and request a free copy of your statutory credit report.
There are several options to see your score for free. The MoneySavingExpert Credit Club gives you access to your Experian score. ClearScore will give you a score based on information provided by Equifax. Subscribing to Credit Karma allows you to view your TransUnion score.
Paula Roche, Managing Director of Consumer Solutions at Equifax UK, says: “Contrary to popular belief, checking your credit report won’t change the score itself, so there’s no harm in throwing a glance, and that can be extremely stimulating.”
…and fix mistakes
Common errors include the wrong address on file or missing relevant information.
If you spot an error, contact your lender to ask them to correct it.
If it fails, you can contact the rating agency to have it fixed or add a note to your report explaining that this is an error.
Borrow – carefully
A common piece of advice for anyone trying to establish their credit rating is to get a credit card. Although it helps to some extent, you have to be careful how you use it.
Responsible use of a credit card shows that you are likely to pay off other debts, which will increase your score.
The most important thing is the credit limit you are given – a high maximum will show up on your credit report and signal that other lenders have already decided that you are a responsible borrower.
However, you also need to think about your credit usage – how much credit you are allowed to borrow and how much you actually use. If you receive a credit card with a limit of £1,500, for example, you should stick to a limit that you impose on yourself and that is lower than the maximum.
Experian recommends only borrowing up to 30% of your limit. If you regularly max out your card, it suggests to other lenders that you rely on the loan for your day-to-day expenses, even though you pay it off every month.
James Jones, head of consumer affairs at Experian, says: “The lowest [your credit utilisation] the better – this reflects how dependent you are on that credit.
Whatever amount you borrow, make sure you always repay it on time or you will be penalized.
Register to vote
Being on the voters list helps banks and other lenders confirm your identity. If you have recently moved, it makes sense to register as soon as possible, even if there are no elections coming up. You can do this online using the government register to vote.
Pay bills on time
How you use your checking account will also show up on credit reports, as will things like whether you pay your phone and energy bills on time.
For example, it could negatively affect your score if a direct debit or check is dishonoured, or if you end up in an unarranged overdraft because there isn’t enough money in your account.
“Just try to keep your account in order – we’re only interested in borrowing, so if you have a positive account we won’t see it,” Jones says.
To avoid mistakes, consider scheduling your direct debits and standing orders to leave your account on or just after payday.
If you live with your partner, it might be tempting to let one person take care of all the bills. But that means you won’t be building your own credit score and it may affect future borrowing, so make sure your name is on some bills.
If you separate, you should also think about how it will affect your credit score, especially if you had a joint loan such as a mortgage. Don’t assume that your credit profiles will be unlinked after your breakup, even if you divorce.
“If you’ve been in a relationship and you’ve linked your credit rating, divorce won’t sever that link,” Jones says.
Once you’ve closed joint accounts or transferred them to sole proprietorship, you still need to sever the link between your credit reports.
Contact the big three rating agencies to request a financial dissolution so that you are not affected by your ex-partner’s borrowing habits.
Even if you’re financially responsible, sometimes life events mean you’ll have trouble making a payment or miss a direct debit. You can add a note to your credit file to explain why your score is low, but you will need to contact all three rating agencies.
This is a correction notice and can be up to 200 words, allowing you to give context such as late payment due to layoff or illness.
It won’t increase your score, but it does mean banks won’t automatically deny your credit application. Instead, they’ll assess it manually – which can make the process longer – and consider offering you a loan with that background in mind.
You can delete the correction notice at any time if you find that you no longer need it.