Understanding Credit Scores
A credit score is an important financial tool that can affect your ability to borrow money, rent a home, or even get a mobile phone contract. Managing your credit score might seem overwhelming, but this guide breaks everything down into clear, actionable steps. It also provides UK-specific examples, tools, and resources to support you.
Here's a step-by-step guide to help you with understanding credit scores.
Understand What a Credit Score Is
A credit score is a number that shows how reliable you are at managing money and paying back borrowed funds.
How a Credit Score Works:
Higher Scores: Indicate you’re good at managing money, making you more likely to get approved for loans or other financial services.
Lower Scores: Suggest you may be at higher risk of missing payments, making lenders less willing to approve you.
Key Terms Explained:
Credit Report: A detailed record of your borrowing and payment history, which is used to calculate your credit score.
Credit Reference Agencies: Companies that collect and store your financial information. The three main ones in the UK are Experian, Equifax, and TransUnion.
Why Is a Good Credit Score Important?
Having a good credit score can make life easier in several ways:
Benefits of a Good Credit Score:
Easier Approvals: You’re more likely to get approved for loans, credit cards, and mortgages.
Example: A good credit score may help you secure a 0% interest credit card.
Better Interest Rates: You’ll pay less interest on loans.
Example: If you borrow £1,000, you might pay only £50 in interest instead of £150.
Access to Services: Mobile phone contracts, car finance, and even some rental agreements require a credit check.
Who Looks at Your Credit Score?
Banks and lenders (for loans or credit cards).
Landlords (to check your reliability as a tenant).
Utility companies (for setting up energy accounts).
Mobile phone providers (for contracts).
What Can Affect Your Credit Score?
Your credit score can go up or down depending on how you manage your money.
What Can Make Your Credit Score Go Up?
Paying Bills on Time: Shows you’re reliable with money.
Example: Always paying your phone bill by the due date.
Keeping Credit Utilisation Low: Use less than 30% of your credit limit.
Example: If your credit limit is £1,000, aim to use no more than £300.
Having a Credit History: Using credit responsibly over time builds trust.
Example: Using a credit card and paying it off in full each month.
Registering on the Electoral Roll: Helps verify your address.
What Can Make Your Credit Score Go Down?
Missed Payments: Late or missed payments show unreliability.
Example: Forgetting to pay your energy bill.
High Credit Utilisation: Using too much of your credit limit.
Example: Regularly spending £900 of a £1,000 limit.
Applying for Too Much Credit: Too many applications in a short time can make you look desperate for money.
Example: Applying for 5 credit cards in one month.
Defaulting on Debt: Not repaying what you owe.
Example: Ignoring letters about overdue payments.
Check Your Credit Score
It’s important to know your current credit score so you can work on improving it.
How to Check Your Credit Score in the UK:
Experian: Free monthly credit score and a detailed report with a free account.
Equifax: Free access via ClearScore.
TransUnion: Free access via Credit Karma.
Example:
Check your credit score using ClearScore, which provides an easy-to-understand breakdown of what’s affecting your score.
Steps to Improve Your Credit Score
Improving your credit score takes time, but these steps can help.
Pay Bills on Time
Set up direct debits for regular bills to ensure payments are never late.
Example: A direct debit for your phone bill ensures it’s paid automatically each month.
Keep Credit Utilisation Low
Try not to use more than 30% of your credit limit.
Example: If you have a £500 limit, aim to use no more than £150 at any time.
Build a Credit History
If you don’t already have credit, consider using a credit builder card responsibly.
Example: Spend £20 a month on a credit card and pay it off in full to build your score.
Register to Vote
Being on the electoral roll makes it easier for lenders to verify your identity.
Check for Mistakes on Your Credit Report
Look for errors like incorrect addresses or accounts that aren’t yours.
Example: Contact Experian to fix an incorrect account on your report.
Avoid Multiple Credit Applications
Space out applications to avoid damaging your score.
Example: Wait at least 3 months between applying for credit cards.
Keep Old Accounts Open
Length of credit history matters, so keep old accounts active (if they’re not costing you money).
Common Mistakes to Avoid
Avoid these pitfalls that can harm your credit score:
Examples:
Missing Payments: Set reminders or use direct debits to avoid forgetting.
Closing Credit Accounts Too Soon: Keep accounts open to maintain your credit history.
Overusing Credit: Don’t max out your credit cards.
Tools and Apps to Help Manage Your Credit Score
There are apps and tools that can help you track and improve your score.
Recommended Tools:
ClearScore: Free access to your Equifax credit report with personalised tips.
Credit Karma: Free access to your TransUnion credit report.
Experian App: Track your score and get reminders about due dates.
What to Do If You’re Struggling
If improving your credit score feels difficult, there are people and organisations that can help.
Who to Contact:
Citizens Advice: Free advice on managing credit and debt. Visit www.Citizensadvice.org.uk.
StepChange: Offers free support for debt management. Visit www.stepchange.org.
MoneyHelper: Government-backed financial advice. Visit www.moneyhelper.org.uk.
National Autistic Society (NAS): Provides support for managing finances if you have autism. Visit www.autism.org.uk.
Practice Self-Compassion
Improving your credit score takes time and patience. Celebrate small successes along the way.
Tips:
If you make a mistake (e.g., miss a payment), focus on fixing it rather than dwelling on it.
Acknowledge progress, even if it feels small, like paying a bill on time.
Example Timeline for Improving Your Credit Score
Month 1: Register on the electoral roll and check your credit report for errors.
Month 2: Pay bills on time and reduce your credit utilisation.
Month 3: Apply for a credit builder card (if needed) and use it responsibly.
Final Thoughts
By following this guide, you can take control of your credit score and improve your financial health. Don’t hesitate to reach out for support or use the recommended tools to make the process easier.