If your credit score is ‘OK’ but not great, you’ll need to sort out things like:
- High balances on credit cards and overdrafts
- High overall amount of debt
- Demographic issues such as how long you’ve been living at your address or being on the electoral roll
If you’ve got defaults, County Court Judgments or have ever been made bankrupt then your credit score is probably poor. See our tips on what to do about a low credit score.
High balances on credit cards and overdrafts
Being consistently at or near a credit card limit may be signal to a lender that you are struggling to pay bills and therefore reduce your credit score.
Credit cards can help you budget better by absorbing the peaks and troughs in your expenditure. Funding single big-ticket purchases, like a kitchen and then quickly paying down the balance is a sensible use of plastic if you can manage it.
Your credit score can go up if credit is available but unused. This suggests that you use such facilities to manage peaks in expenditure, rather than spending on items that you cannot really afford.
Summary: Try to stay well below your credit card and overdraft limits.
For example, if you’ve got a £2,000 limit on a credit card, it’s better to keep the balance at £200 rather than £1,800 – this will really help your credit score.
High amount of overall debt
Lenders will look at how much you owe in total and compare this to your annual income. This is known as a debt ratio.
If you earn £20,000 per year and your debts are £20,000 – your debt ratio is 100%. If your debts were £10,000, your debt ratio is 50%. The debt ratio will exclude any first mortgage you have on a property, but includes any 2nd mortgages.
The higher your debt ratio the less likely you are to get a loan, because you may be considered to be over-indebted.
There’s no hard and fast rule as to what accounts for too high a debt ratio, but if you owe more than 40% of your annual income, some creditors may refuse you a loan.
The impact on your credit score is more complex…
… your credit score will go up if you carry reasonable (not high) balances, but keep up-to-date with your payments. Conversely when you reach a tipping point (e.g. a debt ratio of 40%) your score may fall.
Summary: Try to keep the percentage of your overall (non-mortgage) borrowing to less than 40% of your annual earnings.
Stability is important to lenders. Whilst a credit score is not affected by how long you’ve been in a job, it does fall if you move address. The longer you’re resident in one place; the better your score. Some lenders even operate an automatic decline if you’ve moved around a lot, e.g. more than three times in the last 18 months.
Credit scores favour people who own their own home. Some lenders even operate a system where they will turn down applicants for the best loan rates if they are living in rented accommodation. Owning a property (including on a mortgage) suggests greater stability, the ability to repay a large loan and also gives a lender some security because you own a valuable asset.
Many lenders will also automatically reject your application if you’re not on the electoral roll.
Bottom-line: Get on the electoral roll, (try to) own your own home and move as little as possible.