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Your Credit Score is an important number in your life that you might not yet be aware of, but you have influence over.
Typically, it comes in the form of a three digit number, which gives a company that checks it, a clear score to help them to determine if you are worthy of having their credit (creditworthiness).
There are many simple reasons you could be taking out credit, such as financing your ‘pay monthly’ mobile contract, taking out a car loan, or even applying for a mortgage.
It is incredibly difficult for anyone to go through life without their Credit Score having a basis for a decision that affects them, so I decided to write a post on how to perfect your Credit Score, and why it is so important.
What is a Credit Score?
Your Credit Score is an amalgamation of your payment history, to give lenders an insight into the likelihood that you would be able to pay back any credit they lend to you.
This means your regular monthly payments for Gas and Electricity, Water, Home Broadband, and personal loans such as those on your Home, Car and Mobile Phones will be taken into account.
Any defaults, late payments, or applications for Credit, will have a negative effect on the score.
What is a Good Credit Score in the UK?
There are many agencies which offer a Credit Score which can give you an indication of your creditworthiness.
Our recommendation is Experian, which offers a free Credit Score each month, or a premium account which gives you tips on how to improve your score, and a breakdown of any issues which may be impacting your score.
These agencies each have different metrics for calculating their score, but the rule of thumb is that a ‘fair’ Credit Score sits between 721 and 880.
For those who have above 880, this is good to excellent (with the maximum at 999). The higher the score, the more likely you would be successful with any loan application.
How to Build a Credit Score in the UK?
As mentioned, the history of payments is the most important factor when building the Credit Score.
If you have paid all of your bills on time, for the full amount, then you will have a higher score here than someone who would have missed a payment, or defaulted on a loan.
Make sure to set up direct debits for all your payments to ensure nothing is missed, and also set aside the correct amount plus contingency each month if they are paid out of a designated account.
This refers to the amount of credit you have access to, and the utilisation rate.
If you have a lot of credit available (e.g. an American Express card with a large limit), then lenders might be less inclined to lend to you because you have access to credit facilities that are already approved, and that could put you in financial difficulties if they are used fully.
Despite this having a potentially negative impact, if you have a lot of credit available, but are not using much of it, then this can be seen as favourable, because you are demonstrating that you can have credit available to you, but you don’t need to use it to supplement your finances.
The general rule of thumb is that you should not exceed the 30% utilisation rate of your credit accounts – using more could be a signal that you are in financial difficulty.
Don’t close off old unused accounts, as they could push your utilisation rate higher! If your utilisation rate is high, use savings to pay off the debt until you have a maximum of 30% utilisation for a higher chance of getting the best lending rates.
Length of Credit History
A factor that can improve your Credit Score is the length of the Credit accounts you have held. It is logical to see that having an account for five years with full payment history will see you as more creditworthy, than someone with a one month old account.
Again, don’t close off old unused accounts. If possible, use them periodically, while paying off the balance immediately. Having older accounts is a positive factor for the Credit Score, so closing these accounts could negatively impact your score.
Types of Credit Account
The types of Credit Account you hold also affect your Credit Score, and there are typically three types: Revolving, Instalment, and Open.
Revolving Credit is the most common, taking the form of a capped credit account which allows the user to have full access to the loan without breaching the Credit Limit.
Typically, the user would pay this account with minimum monthly payments, and interest accrued on the remaining balance.
Installment Credit is what you would take if you were buying a large purchase with a fixed payment plan. This includes Car Loans, Mortgages, and Personal Loans.
The Interest and Principal are calculated for the life of the loan, and a fixed payment schedule is defined for the total cost to be paid within the timeframe outlined at origination.
This is a rare form of credit which is similar to Revolving, with the distinction that the full amount must be repaid at the end of the month – rather than paying a minimum amount, you are required to pay the maximum amount.
By having a combination of credit account types (e.g. a Credit Card, and a Mortgage), can demonstrate to lenders that you are responsible with Credit.
If you have multiple Credit account types, then make sure to pay the minimum amount stipulated in the contract to demonstrate your responsibility with these forms of Credit.
We don’t explicitly recommend that you take out a loan in order to have a diversity of Credit accounts, but if you have no existing accounts of either form, then opening a Revolving Credit account that is paid off in full immediately can help build the score.
New Credit Applications
Finally, any new applications for Credit will have an impact on your score.
If you are requesting a line of Credit from a lender, they will check your Credit Score with a ‘hard inquiry’, which means there is a recorded evidence that you needed finance at that point of time.
If you have two or more requests within a short period, the lender may believe that you regularly get into financial difficulty.
If you are looking to apply for new credit, try to leave at least three months between checks, with a recommendation to wait six months. Unfortunately, the ‘’hard inquiry’ will be on your account even if you don’t accept the terms of the Credit agreement, so don’t be tempted to ‘shop around’.
What is a Good Credit Score in the UK?
The higher the score you have the better. A higher score will allow you to have access to more favourably priced products (i.e. lower interest rates).
Anything above 881 is a ‘Good’ rating, and anything above 961 is an ‘Excellent’ rating.
Other than the tips above which are written in italics, there are other steps you can take to ensure that you improve your Credit Score:
- Sign up to a Credit Score Agency such as Experian, which can guide you on what to improve, and what may have affected your score,
- Regularly check your Credit Score, and have a plan to resolve any issues,
- Sign up to the Electoral Register in your area. This has a positive effect on your score,
- Ask to raise your Credit Limits to lower your utilisation rate,
- Dispute any black marks in your history if you believe they are incorrect.
An Experian account lets you access your Experian Credit Score for free which is updated every 30 days if you log in. Your credit score could make the difference to your chance of getting credit, and Experian believes that everybody should be able to access it without paying a penny. On Experian.co.uk you can also see your chance of being approved for credit cards and personal loans before you put in an application.