How to check and improve your credit rating
Confused or concerned about your credit rating (and still not completely sure what it is, if you're being honest)? We've got everything you need to know plus tips to improve your score!
There tends to be a whole lot of confusion involved when it comes to credit ratings, and to be honest, that's really not surprising.
The main issue with the credit rating system is that there's no clear methodology in calculating a person's credit score, and how credit companies choose to judge your score varies from one business to the next.
There are also so many rules about disclosing personal data that trying to get answers to queries about your credit rating can be more difficult than drawing blood from a stone.
What we do know, however, is that having a good credit rating is really important – particularly if you ever want to apply for anything like a mortgage, or a loan to start up your own business, for instance.
This might seem like a bit far off in your future plans to be thinking about now, but the key to building a great credit score is to get started on improving it nice and early!
We're here to fill you in on exactly why your credit rating matters so much, and how to get working on improving it.
What's in this guide?
What's a credit rating?
Essentially, a credit rating is a kind of grading system used by banks and lenders to work out how much money you should be given when you apply for a financial products like credit cards, overdrafts or a mortgage (or whether you should qualify for these 'products' at all).
Banks and lenders use the evidence they're given from your credit report regarding how good you've been with your money in the past, to determine how well you'll look after your pennies (or theirs, to be precise!) in the future.
For example, if you're applying for a student bank account, your credit rating will determine whether or not you should be given the maximum amount of interest-free overdraft.
Similarly, if you apply for a student credit card, your credit score will help the bank decide what the limit on your card should be (if you're not so good with money, they'll keep the limit down to avoid having to chase you up for payments).
How important is my credit score?
Despite what you might've been told in the past, the idea that there exists some sort of credit score 'blacklist' that prevents people from taking out loans 'cause they've got some crazy outstanding debt isn't true, so don't sweat! However, if your score is low, it does make being accepted for financial products more difficult.
Your credit record also isn't held on a single database, but with three different major credit companies: Callcredit, Experian and Equifax. This means that your score could be different on one company's records than it is on another.
Your credit rating is also just one factor in a bank's decision-making process when deciding whether to give you a financial product. Therefore, they may still give you a great deal on a mortgage despite your credit rating being poor, just because you've had a good history with them personally.
However, whilst there are lots of factors involved, you can help yourself just by being aware that your credit score exists, and try to nurse it to good health to keep your future lending opportunities as wide open as possible.
What do I need a credit rating for?
You need a credit rating in order to give banks and lenders an idea of how you handle your money.
In this sense, it's fair to say that having no credit history at all is just as bad as having a poor credit history!
Think of it this way: If you were a bank, would you feel more confident lending thousands of pounds to someone who has no record of ever having paid their bills before than you would someone who had missed a few payments?
The risk involved here for banks is just as high to lend to someone who doesn't have a credit score, which is why banks simply won't dish out to anyone without one.
As mentioned earlier, you need a good credit rating to apply for a mortgage or loan, but you also need it if you ever want a credit card (ironically, since you might need a credit card to build up your credit rating in the first place) or even if you want to sign yourself up to an expensive phone contact (which you won't be allowed if your rating isn't up to scratch).
Your credit rating can also affect how expensive your monthly home or car insurance payments are, so it's definitely worth looking into!
How are credit scores calculated?
Nobody knows the exact criteria used to determine your credit rating, and different credit companies use a variety of factors when grading you. This is why it's best to check with all three (see companies below) in order to give yourself an accurate figure.
However, what we can tell you for sure is which factors are taken into account and which definitely won't be included in your report…
What they will check:
- Past bank dealings
- Bill payments (if you're late or ever forget to pay your bills)
- Mobile phone contract payments
- Credit card history
- Loan history
- Building society history.
What they won't check:
- Student loan repayments – contrary to popular belief, student loans don't have any influence on your credit score
- Parking fines (phew!)
- Whether you've checked up on your credit rating
- What your salary is (although the bank will check this)
- Savings accounts (only your current accounts are included)
- Gambling activity
- Council tax payments (these are kept separate from credit scores)
- Any criminal records you might have.
3 ways to check your credit rating for free
If you're concerned about your credit score – or are even just a bit curious to see what yours looks like – then it's possible to check your records with all three major credit agencies for free on a trial basis.
Remember that each credit company will grade your score differently, so it's best to check all three to get a good overview of your situation.
How it works
It's worth knowing that there are now two different ways you can check your credit score: You can either get simple access to your score/report once a month, or you can sign up to pay a monthly fee and the company will manage your file at all times and alert you if any changes occur.
If you go for the latter, you'll be offered a free trial of a few weeks when you sign up. You can always sign up to this initially and cancel later (but remember to actually cancel!).
Experian is now the UK's biggest credit referencing agency.
Your Experian Credit score can now be accessed for free through their new CreditMatcher option.
If you're keen to delve further into your actual report, as well as receive other perks like notifications when something on your file changes, you can sign up to their other service, called CreditExpert, but this comes with a £14.99 monthly fee.
Equifax is the second largest agency, and you also have two ways you can access your credit score with them.
The first option is to apply through a company called ClearScore – they're not directly linked to Equifax, but they let you access your credit score for free in turn for being able to send you deals on credit cards and other financial products (which they earn commission on if you sign up).
Otherwise, you can sign up to a free 30-day trial directly with Equifax, and after the first month the charge is £14.95 per month.
If you don't cancel at least 24 hours before the 30-day trial period has ended, you'll be charged the monthly fee.
To cancel your subscription, call 0800 090 2219 (free) with your reference number to hand.
Warning: Unfortunately, one of the reasons you can only cancel over the phone is their team want to try their very hardest to talk you into staying, so pick up the phone with a strong head on your shoulders!
This agency is little used by banks and other lenders, so we'd only recommend checking your Callcredit score alongside the other two major companies above.
You can check your score for free through Noddle (which is part of the same company) so it's worth giving this one a bash to see how your score stands.
As with CreditScore mentioned above, it's worth being aware that Noodle will also try to sign you up for financial products you probably don't need, so get your nonsense filter on!
6 ways to improve your credit rating
After checking your credit reports with all three companies, it is a possiblity that you might be a bit unhappy with the score you've currently got.
And if this is the case, don't worry – you can still do something about it!
Here are our top tips for improving your credit score:
Make sure the details are correct
If you don't agree with something in any of your credit reports – or you've noticed any errors (this does happen!) – then you'll need to make sure something's done about it.
You can fix this by calling up the credit company themselves and asking if they'll look into the errors. They may require you to contact the company that has given them the incorrect data (e.g. your mobile phone company or your bank) to amend it.
Get a credit card; use it wisely
The most straightforward way to improve your credit rating is by taking out a credit card and employing some serious military-strength will power with it!
The best way to ensure this is by designating a specific payment purpose for that credit card and using it for this purpose only (so no last-minute holiday bookings that you will "definitely pay back at some point," ya hear?).
You can then set up a minimum monthly repayment by direct debit so that the card is paid off in instalments each month. The fact that you’ve been offered credit (money) that you’re free to spend and have displayed financial discipline by keeping up with repayments each month will work in your favour.
If you're not keen to go down the credit card route (or you're not in a position to get your hands on one) there are some prepaid credit cards that have features specifically designed to help build your credit score, and the bonus is they come with no debt risk as you'll only be spending cash you already have.
Pay all your bills on time
The most simple way to improve your credit score is to make sure that you pay all of your bills on time.
This includes utility bills, mobile phone contracts, rent and any form of loan repayments (except student loans, of course!). If you're good at paying your rent on time, you can also use this to score points on your credit report by setting up an account with Credit Ladder (more on this in point 5 below).
Be cautious about having your name on all the bills if you're in shared living. The worst case scenario could end up being that if someone can't afford to pay up, it's your credit score that gets tarnished.
Get on the electoral roll
If you aren't on the electoral roll, it's unlikely you'll be accumulating any credit at all!
A lot of students fall foul to this one because after moving away from home, registering at a new address can seem like a hassle.
However, it's actually super easy to register online (we estimate about 2 minutes of your time) – and your credit rating counts on it!
You'll find everything you need to know about how to register for the electoral roll on the About My Vote website.
Record your rent payments
Since March 2016, it's now possible to arrange for your rent payments to be shown in your credit report. Inventively called 'The Rental Scheme,' this is a great option for anyone who's good at paying their landlord in time and looking for ways to beef up their credit score!
How it works is that you arrange to start paying your rent through a third party website called the Credit Ladder. Credit Ladder then act as a sort of middle man and pass on your rent to your landlord (as you can imagine, your landlord also needs to consent to this first!).
Every time you pay Credit Ladder, they record how punctual you are with the payment, whether you paid the right amount, and stores this data to be picked up in your credit report. Pretty neat!
Space out applications for credit products
Every time you apply for what's called a 'credit product' such as a mobile phone contract or a new credit card, it leaves a 'footprint' on your credit report. This is because banks want to be weary of people who apply for credit products and get rejected, or even those who purposely take out credit products in order to get a credit rating.
The key is to make sure you spread out your applications as much as possible, and only apply if you really need to. If you're denied credit at any point, wait at least 30 days before reapplying.
How to avoid a bad credit rating
Finally – there are a few small slip-ups to be aware of that might be damaging your credit score without you even realising!
- Never use your credit card to withdraw cash at an ATM. Not only are interest rates on this completely ludicrous, but this will show up on your credit report, too. Withdrawing cash using a credit card gives the impression you've had to resort to emergency measures, spending cash you don't have due to bad budgeting.
- Never take out a payday loan! Of course, we already know how terrible these loans are (so bad that Google have even banned them from advertising through search engines), but these loans are not just bad for you bank balance. Just having them appear in your credit report looks terrible to lenders.
- Never pay out for what's advertised as a 'credit repair service'. Essentially, there's nothing that these companies can do that will help you (except advise you on all of the above points, which we've just given you for free!). Don't waste your money on these guys.
- Don't hold on to any old store cards you have but aren't using. If you're seen to have heaps of credit sitting but not being used, this can be damaging too.
Hopefully we've shed at least a tiny bit of light on the complex mystery otherwise known as the world of credit scoring! We know this stuff can be a bit of a headache, but you'll get there!
The trick is just to try and show the banks that you know to look after your bills, and the banks will look after you (in theory).
Let us know if you have any questions in the comments below!