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Guide to Improving your Credit Rating

If you have ever applied for a mortgage, loan or mobile phone contract, then you may already be familiar with the idea of ‘credit scores’.

This rating determines your suitability for credit, however, there are many misconceptions on what factors can influence your overall score.

This guide will explain the basics of credit scores and what steps you can take to improve your overall rating.

What is a Credit Rating?

A credit rating is a score that lenders will give you based on your financial records (i.e. your incomings and outgoings, as well as your track-record of paying bills on time).

Each lender gives you a score and based on that score, as well as the lender’s own affordability checks, they will issue you a rating. This rating will determine whether you are suitable to take out a contract with that company. The score is designed to predict your future spending habits, based on your current and past spending activity.  

A Credit score is not:

• One number shared across all companies in the UK. One company may do a credit history check and deem you unsuitable, however, another company may find you eligible.
• Purely based on the ‘risk’ you pose to lenders. A company may also rate you according to their ability to turn a profit from your custom.

As well as determining whether you can afford to pay your mortgage/loan, and pay it on time, your personal credit rating will also determine what rate of interest you will be charged by your mortgage provider.

A good score will land you a lower rate of APR, as a rule of thumb. However, some lenders will advertise mortgages rates as “representative.” This means that if you have an approved credit rating, you will be eligible for the advertised rate, along with 51% of their other customers. On the other hand, if you do not meet their requirements, you may be charged a higher rate of APR.

Please note: Your eligibility is not solely based on your score. When applying for a mortgage, the lender will also take into account what you have written on your application.

How Can I Find My Credit Score?

There are three main websites where you can see your credit score;

• Experian
• Call Credit
• Equifax

What Determines my Credit Score?

Your credit score is based on a number of different factors, which will vary depending on the lender’s preferences. Some things that could influence your rating include;

• Your Level of Debt – The more money you owe, the lower your credit rating will be, as you will be deemed a higher risk to lenders.
• County Court Judgements –These entries will stay in your credit file for six years.
• Bankruptcy – Stays on your file for six years. It is not a wise move to apply for a mortgage whilst you are still in the six-year time frame, as this can have a negative effect on your rating.
• Missed Payments – Paying bills on time is vital to achieving a good credit score. Setting up standing orders for all your regular outgoings can help. For credit cards, make sure that the limit you have is not too high. If you regularly only put a couple of hundred pounds on your card, for example, lower your limit, if it is in the thousands. Also, make sure that you always make the minimum payment every month.
• Payday Loans – Taking out a payday loan may affect your credit score, as these are an indicator to the wider credit industry that you may have faced some personal budgeting issues in the past.
• Credit Card Cash Withdrawals – This also suggests to lenders that you may pose a risk. If you want to withdraw money abroad using a credit card, you could try applying for an overseas one.

The ideal mortgage applicant will have taken out some form of credit before and will have an excellent record of paying their bills on time.

What Else Can Affect my Credit Rating?

Too Many Applications - Applying for a number of loans and mortgages at around the same time can have a negative effect on your credit score. This is labelled in the industry as a ‘hard footprint’ or ‘hard search,’ and other lenders will be able to see these applications.  

See our guide to the benefits of using a mortgage broker, it explains that going through a financial advisor will mean that they can shop around and find you the best deal on your behalf.

Too Many Credit Transactions – If you pay for lots of things on credit, this could negatively affect your credit file, even if you always pay everything off on time. Fewer transactions, spread out over a longer timeframe may make you a more attractive prospect for some lenders.

Inconsistency - Similarly, if you list different telephone numbers or altered job titles on your mortgage application forms, lenders may see this as an inconsistency in information, which in turn could have a negative impact on your report.

Instability - Stability can also be an indicator of your credit worthiness. If you change jobs frequently or move to different rental houses regularly, this could potentially have a negative effect on your credit rating.

No Credit – If you have avoided taking out credit completely, you may have negatively impacted your credit file.  This is because lenders, when examining your finances, may have too little information on you to determine whether you will be a reliable customer or not.

Is There a Chance My Credit Score Could Be Wrong?

It is vital to ensure that the information provided on your credit report is correct. There are several credit score checking websites online, where you can check what the lenders see in your application. Items which you can change and correct include;

• Your entry on the electoral register.
• Your financial links to former flatmates and partners. If you are no longer connected financially to a person, make sure their name doesn’t link to you on your report. If you would like to separate your finances from a former link, you can write to a credit reference agency and apply for what is known as a “Notice of Dissociation.”
• Credit cards and store cards which you no longer use. Make sure these accounts are paid off and closed, as this may affect your rating.
• Addresses and contact details. Make sure all entries are correct. Not updating your address on your phone contract, for instance, could affect your rating.
• Incorrect information about payments or other mistakes you may notice in your record. If you have checked your own rating and you see that there is something that looks wrong, you can apply to the relevant credit rating agencies to get this changed. You will need to firstly write to the lender to ask for the entry to be deleted. Once you have done this, you need to apply to the credit agency with a factual Notice of Correction, with proof of the error. As a last resort, you can also complain to the financial ombudsman who will then assess and decide if that entry is unfair and can be deleted.

If you notice any of the above changes in your credit score, write to the credit agency, providing evidence and get them to make the corrections to your credit report.

 How Can I Improve my Credit Score?

If you have no credit rating, i.e. lenders have too little information to make a prediction about your future spending habits, or if you have a less-than-perfect score, you can take the following steps to improve your credit file;

• Take out a Credit Card – For those starting to build their credit rating, taking out a credit card and spending a small amount each month can start to have a positive impact on your record (provided you pay it back on time each month).  If you have a bad history, you may find it difficult to get a conventional credit card. However, you can apply for a Credit Rebuild Card, which may have a high rate of APR, but it will help you build a healthy score (provided you also pay your bills on time).
• Get on The Electoral Roll – Registering to vote and ensuring that your address details are correct will have a positive impact on your credit rating. You do not have to submit your details to the public register for all to see, however getting on full version (visible to lenders and anyone who requests to see the full register) is important.
• Set up Direct Debits on all Bills – ensuring that you pay your bills on time is a major determining factor in a lender’s decision to offer you any type of loan. Setting up direct debits for regular payments is a very easy way to manage your finances.
• Make Overpayments – If you have a credit card and only pay the minimum every month, make efforts to overpay, as this can help your rating. Provided you can afford your other financial commitments.

What if I Have an Adverse Credit History and Still need a Mortgage?

As stated previously, rejection from one lender does not equal rejection from all lenders. You could try talking to a specialist broker who may be able to help you find a suitable loan for bad credit history. For more on this, check out our Guide to Getting A Mortgage with Bad Credit.

There are also alternatives for those who have not built-up a rating yet, you could try looking at our Guide to Guarantor Mortgages, Shared Ownership, Joint Mortgages, or Family Offset Mortgages for more suitable options.

Your credit rating is important, but it is not set in stone. If you would like to seek independent advice from a mortgage advisor, get in touch now.