What’s credit scoring?
A credit score is a three-digit number that can determine whether a loan application is accepted. Improving your credit score can often reduce the interest rate you’re charged for loans.
Better scores help you get the best deals on other bills, like phones, gas or electricity.
There are literally hundreds of factors that contribute to a credit score. We list some of these below as part of a guide to improving your score. Credit scores are provided by the three main Credit Reference Agencies, Experian, Equifax and TransUnion. There are many factors that determine whether your score is bad, fair, good or excellent. A score can vary from month to month.
Improving a credit score
Everyone is different. These tips are a general overview of actions you can take to improve a credit score.
1.Pay everything on time
Most Credit Reference Agencies report a series of numbers next to any credit account you might have. An account ‘status’ of ‘0’ shows that payments are up to date. A status of ‘1’ shows that the account is one month in arrears. If you miss several payments in a row, the account might show as a default. Defaults can reduce a credit score significantly.
If you pay credit accounts are paid on time this improves your score. Points are deducted for missed payments. Lots of different kinds of services are also considered to be credit accounts, including gas, electricity and mobile phone accounts. Some landlords and water companies might report rent arrears to a Credit Reference Agency. It is important to remember that stopping paying a mobile phone contract can result in a default which will significantly harm a credit score.
If lots of payments are missed and a borrower becomes subject to a County Court Judgment, Debt Relief Order, Individual Voluntary Arrangement or bankruptcy the credit score will fall significantly.
2.Have plenty of accounts
Lots of up to date accounts is better. Borrowers managing multiple commitments with payments on different days shows commitment and ability to repay. But beware. Owing too much compared to income might show that a borrower is over-committed. This can then reduce the credit score.
Interestingly if someone has very few accounts, perhaps because they’ve never needed to borrow before, the credit score is unlikely to be very high because there’s no record of them being able to pay a debt back
3. Only using a small proportion of credit card and overdrafts
A credit score can increase when credit is available but unused. This suggests that a borrower uses credit cards and overdrafts to manage peaks in expenditure, rather than spending on items that they cannot really afford. Borrowers constantly at their limits will see their credit scores fall. For example, a credit card with a limit of £500 and a balance of £50 will help with the score. But a balance of £450 will probably be driving the score down.
4. Re-registering on the electoral roll
It is a criminal offence not to register to vote. But rolling registration has made this harder. Voters must register each year. If they don’t, they will drop off the register. The electoral roll is reported to all the Credit Reference Agencies, even if the voter has opted out of the public register. It is used to help prove identity. It shows stability in residency.
5. Staying put; don’t move home, don’t move job
Lenders like stability. Knowing someone is staying where they live make it easier to maintain contact with a debtor. The likelihood of someone running away on their debt reduces. Long residency applies to people renting their home as well as those with mortgages. But people in rented accommodation will rarely have credit scores as good as owner-occupiers.