By Matthew Watson
Credit files cause a lot of confusion, probably because they are designed for and primarily used by banks and other lenders – rather than you and me. These lenders live in a world that is full of complexity and often short on transparency. But your credit score exists in the real world and it’s worth knowing a thing or two about how it can help you when you’re thinking about opening a new bank account, buying a car, getting a mortgage or taking out a new phone contract.
A credit rating is essentially an indication of how likely you are to be accepted for credit. It’s a prediction of how risky you seem to banks and lenders based on how well you’ve managed credit in the past.
If I asked to borrow £1000 off you today to pay my rent, you would probably want to know a bit about me first: that might include how much I earn, whether I borrow money off people regularly and (probably most importantly) whether I have a history of screwing people over. Banks and other lenders are no different; when you apply for a credit product they want to know as much about you as possible – they do this by looking at your credit file.
When looking at your file, lenders don’t actually see a uniform number or credit score but instead review lots of different information. This may include historical data, like how many applications for credit cards you’ve made recently and how good you are at paying off those credit cards. They will then use this, along with information that you provide (your income etc.), to determine how likely you are to repay any money they lend you.
A good credit history takes time to build, so if you’re thinking about applying for any of the following in the next few years, improving your credit management should be a priority.
- A mortgage – If you have ambitions of owning your own place you will need to apply for one – and a poor credit score will mean you are rejected by every lender on the block. If you’re planning to buy in the next year, this article gives some good general tips on managing your finances.
- Credit cards – Looking to spread payments on a big purchase (like a car) over a period of months? Remember that annoying bloke boasting about how he paid for flights to Dubai with his Amex points? Effectively managed credit cards have lots of advantages but getting accepted for one will depend on your credit score.
- Phone contracts and car insurance – You will often be subject to a credit check when applying for these, as providers allow you to spread the upfront cost over a number of monthly payments (effectively they are giving you a loan). Getting rejected on a good deal due to your credit score can be costly and is totally avoidable.
Importantly, providers will also adjust the pricing of the products above depending on how risky you appear as a borrower – for example, a good credit score can mean a cheaper mortgage (as you’ll qualify for a lower interest rate).
The credit reference agencies hold your credit file but requesting a search directly can, in some cases, cost money or negatively impact your score. Head to Clearscore, MSE Credit Club or Credit Karma to view your score for free without impacting your file.
Building your credit history is a long-term project, but it’s low effort and you can do a few things right now that will lead to month-on-month increases to your score.
- Get a credit card and pay it off in full every month. This is the single most important step to building a strong history – every month you meet your payments you are proving your responsibility in managing credit. You can set a direct debit from your bank account to clear your credit card balance every month. If, for any reason, you don’t have enough to cover the full amount, make sure you still meet the minimum payment that month. Never miss the minimum payment. Check out this link if you’re unsure about which card to get.
- Register to vote. Just in case you needed another reason to do this; lenders will check the electoral register to make sure you are living in the UK before handing out any credit.
- Never withdraw cash on your credit card. Cash withdrawals on credit cards are expensive and lenders will see this as evidence of bad money management. The same goes for taking out payday loans – avoid these at all costs!
- Increase your available credit. Phone your bank and ask if they will increase the limit on your credit card. Alternatively, you could apply for a new credit card. By increasing the total amount of credit that you have available, any money that you do borrow will represent a lower proportion of your total available credit (lenders like this). Don’t overdo it though – more than 3 applications or increase requests in a short period can look desperate (and no one likes that).
- Update your address. You’ve probably moved home a few times since you left your family home. Take half an hour to go through all your accounts and ensure they have your current address on file – this should help you pass any ID checks required by lenders.
- Contact lenders to dispute any errors on your file. If you spot a mistake or inaccuracy on your credit file, call the agency or the lender involved to get this corrected as soon as possible. If you end up having an application rejected because of the mistake, this will only do more damage to your score.