It is an unavoidable part of modern life – credit, loans, debt, and, of course, credit scores. In order to get your dream house, dream car, or even just to survive financial emergencies, such as unemployment or unexpectedly large bills, at some point you will be in need of credit, and for that, you will need to understand your credit score.
Your Credit Score vs Your Credit Report
First of all, you need to get your head around some definitions:
- Credit Score: This a number you are given which denotes your ‘creditworthiness’, or how likely you are to pay back your loans. It is sometimes referred to as a credit rating, or a credit ranking, and potential lenders use it to determine if they want to lend their money to you. Various data is collected about your past financial conduct, which influences your credit score. This can include:
- The total amount of debt that you currently owe
- Any details of your unpaid debts
- The amount of credit that is currently available to you, such as the credit you have available on your credit card.
- Information about times you have defaulted on your loans
These attributes are given individual scores, and these scores are added together to create your final, ‘credit score’.
- Credit Report: Your credit report is a more comprehensive document, and it helps to decide your credit score. It will have the above information and all sorts of other information about your financial history.
You can check your credit report with a number of different agencies. It is recommended that you consider one of the three largest credit reference agencies in the UK, particularly as they each offer a form of free credit check:
However, it is important to note that, while these reports are free, you will often need to pay to see your actual credit score. You may also have to sign up to a subscription to get the free deal, so don’t forget to cancel the subscription before you are charged.
When you are checking your credit report, or credit score, it is very important that you read it carefully. There are a few key things that you should keep an eye out for:
- Incorrect Personal Information
This information includes your name, you address history, and other personal history. This is particularly important if any of your personal information has changed recently. You may have got married, changed your name, or have moved to a new house, and their records may not have been updated.
- Incorrect Debt History
Your credit cards, loans, mortgages, and other finances should all be accurate. You should check the details of every single one. There may be a credit card that you have since closed, or a missed payment that you actually paid. It is unlikely that some credit would be missed off the report, but it is worthwhile to mention it, particularly as, if you have kept up with payments, it may well improve your score.
- Other Mistakes
If there are any other problems, don’t hesitate to take it up with the credit agency. Changing any information on your credit report can take a long time, so it is worthwhile to check everything well in advance of any applications for credit.
What makes your Credit Score worse?
Your credit score is a combination of scores about your financial history. This means your credit score is made worse when your financial history demonstrates you as being unreliable. This could include:
- Having multiple credit cards, or having access to a lot of credit
- A history of defaulting on your debts
- Having a lot of debt
- Paying council tax, or bills late
- Being Bankrupt within the last six years
- Being involved in an insolvency solution in the last six years. Although, the specifics can vary.
- Missing Payments altogether
- Having no credit history at all. This may happen if you have just moved out of your parents home, or if you are new to a country
- Checking your credit score often, or applying for credit often. This demonstrates that you might be desperate, and thus already struggling with debt. You should only apply to see your credit report, or score, when you absolutely need to.
Your Credit Score is not affected by everything. Here are some financial issues that would not affect your credit score:
- Your Bank Savings
- Your partner, or spouse’s, credit report, or score. Although, if you have any shared bank accounts, or joint debt, it may be considered. If you are taking out a joint loan, then it will almost definitely be considered.
- Your Student Loans, unless you have had to default on your loan.
- Your rent arrears, unless the debt is passed on to a debt collection agency
- Many people believe you can inherit the credit score of a home you move into. This shouldn’t be the case, and if your credit report appears to reflect this, then you should query the report.
How can you improve your Credit Score?
The good news is there are some things you can do to improve your credit score, although some are faster than others:
- Make sure you are on the electoral register. This can be the fastest way to improve your credit score, and it works because it allows credit agencies to see you as responsible, and to feel as though you can be held accountable.
- Take out a credit card. This is only advisable to those who are facing a poor credit score due to a lack of financial, and credit, history. Before you do this, do a lot of research, and only spend what you absolutely can afford to pay off later. The more you prove you are able to pay your credit card bills, the more reliable you become.
- Put your utility bills in your name, if they aren’t already. This is very similar to the point above. If you are sharing a house with flatmates, make sure some of the bills are going through your account and that you are paying them on time. This will make you more creditworthy.
- Switch to Direct Debit, or standing orders to pay your bills. This will make it less likely that you will miss a payment.
- Seek a Debt Solution, such as a Trust Deed. This is best if you have a poor credit score because you have missed many payments and are seriously struggling with your debts. Your credit score will not be improved immediately, and, as stated above, it is important to note that it may make your credit score slightly worse for the years it is attached to your credit report. However, it will help you to pay off all your unsecured debts, allowing you to have a relatively fresh start, without you having to resort to the disruption of bankruptcy. This solution may not be perfect for everyone, so you may want to find out more.