Credit scoring is something most of us will have heard of. But we are not familiar with how it works and how crucial it is to our financial life.
Basically, your credit score is used by lenders to decide if they think you are a reliable person to give a loan, credit card or mortgage to.
Your score is based on how you handle your finances. You get a higher score if you pay your bills on time, pay credit off in full by the end of a term and don't rack up debt on credit cards or keep dipping into an unauthorised overdraft.
Information is recorded on your credit file by the UK's three major credit referencing agencies (Equifax, Experian and Callcredit). They collect all the details from financial firms and turn that into your credit score that determines your level of risk.
Although different lenders have different scoring systems – and, indeed, different lending policies in general – the credit score does provide a consistent and reasonably-transparent means for a sound decision-making process across the industry.
The key for everyone is to ensure they have the highest possible credit rating, as that means you get access to the best financial deals.
Here are five simple ways of doing just that…
1. Make sure you have a credit history
Many loan applicants are declined because of a low credit score as a result of a lack of credit history. It may seem odd, but not having a credit history means you can’t demonstrate an ability to pay off debt, so lenders may deem you a greater risk.
Having a mobile phone contract, credit card or overdraft facility with your bank can all help prove your ability to settle obligations and debts, and thus build your credit score.
2. Keep your debt down
While you need to use various credit facilities from month to month to show you can repay debt, it is also hugely important to keep balances under control. Certainly with credit cards and overdrafts, you should never use more than three quarters of your agreed limit, but ideally you should be looking to pay them off entirely by the end of each month.
3. Don’t leave a footprint
Although most lenders will conduct what is known as a ‘soft search’ when you make an initial application with them, some will do a 'hard search' when assessing you.
A 'soft search' doesn't leave a trace on your credit record but a 'hard search' does, and this can affect your score.
Lots of applications could raise alarm bells that you are trying to access too much credit and put lenders off. Check company websites to find out how they assess loan applicants before you apply.
4. Review your credit file
It's not a classified document, so you can, often without a charge, request a statutory report from any of the main credit reference agencies. This will contain all of your credit repayment data from the last six years.
Be sure to check it as sometimes things like arrears or late payments can be incorrectly recorded, and could unfairly count against you. To get these amended, you can file a ‘Notice of Correction’ or similar document with the credit reference agency.
5. Do the little things right
There are a couple of things that will help. It is essential that you register yourself on the electoral roll, even if you don’t actually exercise your right to vote. You should also try to avoid moving house too often, as this could suggest a pattern of transient behaviour.
And finally, be responsible with your finances. Avoid payday lenders, keep any gambling to a minimum and spend within your means.
A bit of discipline, preparation and attention to the smaller details will go a long way to building your credit score so that when you next apply for a loan, you get the nod of approval from the lender – and at a rate you deserve.
*** Don't forget to check our guide which contains information about Credit Score.
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