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Your credit rating: why it matters and how to improve it

3 minutes

In today’s interconnected world, what lenders, utilities and retailers know (or think they know) about you can be all-important if you want the best deals.

  • How credit reference agencies rate you
  • What will a poor credit rating cost you?
  • How can you improve your rating?

Your credit rating: why it matters and how to improve it

Q: How much does it cost to borrow money? Or pay for goods or services on credit?

A: There’s no simple answer; because – while the Bank of England’s all-important “Base Rate” is just 0.75% [1] – what’s added to that will vary. The more favourably you are viewed as a credit risk, the lower the rate of interest you’ll pay. The reverse also applies – and you may not even get credit at all. Moreover, it’s surprising just how often your “credit rating” comes into play.

“Everyone will know that having a good credit rating and credit report is important if you want to get a mortgage, credit card or loan,” says Lee Healey, Managing Director of IncomeMax CIC, an organisation that helps families take control of their finances through personal money advice.But it can also affect things like mobile phone contracts, car insurance and bank accounts.”

So, it’s not just banks and finance companies that can reply: “The computer says ‘no’”.

Ask a furniture store if you can pay in monthly instalments, and your credit rating will determine their response. Try to hire a car, rent a flat... even persuade an energy company to give you the best deals… your credit rating will potentially save (or cost) you a great deal of money.

So how are credit ratings arrived at?

Banks, building societies, retailers, utilities, loan providers and a host of other organisations have a vested interest in reducing the risk they face when doing business. So our key financial transactions are recorded and shared through credit reference agencies.

“There are three major credit reference agencies in the UK: Equifax, Experian and TransUnion,” says Lee Healey, “and they all hold information and data on us which lenders use to make decisions on credit applications. And there are many things that affect your credit reference file - including application details, credit history, electoral roll information, addresses, financial links and fraud data.”

In brief, if we pay our bills on time and don’t run up debts that we appear unable to pay, that’s viewed favourably. Equally, it helps if you are seen to be paying bills, having credit and being “part of the system”. Not having much of a “footprint” can really count against you.

Crucially, your credit score is not written in stone… so paying off a loan or HP agreement could improve it, while falling behind on payments has the opposite effect.

How can you check your rating and what is affecting it?

On the credit reference agency sites, you can find out your rating, what they know about you and any negative factors affecting your score. Critically, this provides an opportunity to spot and correct errors.

On top of reports on any credit accounts you have, and payments you have (or haven't) made, there will be data on more serious problems – such as court judgments for unpaid debts, bankruptcies or individual voluntary arrangements.

“To really understand your rating, you should check your credit report file with all three agencies at least once a year,” says Lee. “Under the new GDPR rules, it's now free to check your file - so don't feel obliged to take out paid subscription services.”

Banks and other larger institutions will also keep their own records; and, because they analyse their data differently, they may well vary significantly in how they view you.

Can you be too good with your money management?

Surprisingly, yes. Having a good credit rating is not the be-all and end-all. Those who always pay off cards at the end of the month and regularly move borrowing about to take advantage of 0% deals may find themselves turned down on occasions… after all, who wants to do business with you if you’re not going to make them money?

The top ten tips to improve your credit rating

  1. Register to vote – even if you don’t actually cast a vote. Lenders check the electoral roll as a precaution against fraud, to ensure that you live where you say you do.
  2. Never miss or be late on payments – and that includes cards, HP, utilities, rent or mortgage.
  3. Make more than “minimum payments” – otherwise it looks like you’re struggling.
  4. Ensure that anyone who previously lived at your current address is not still linked to you – their bad record could impact upon yours.
  5. If you have a joint account with someone with a poor credit rating, you might want to uncouple yourself (financially!) until theirs is sorted out.
  6. Be consistent (and honest) in credit applications. Providing different details about your salary or accounts might get picked up.
  7. It helps to have credit cards and store cards that you’re paying back – but don't go crazy with applications as each time you leave a “footprint” for up to 12 months. It's also wise to close accounts you are no longer using… don’t just cut up the card!
  8. If you run into trouble, seek free debt advice as soon as possible to mitigate the damage.
  9. If there are errors on your file, contact the credit reference agencies to correct them.
  10. Build up a positive record: “credit building cards” charge higher rates… but if you use them and pay them off at the end of each month it will count in your favour. Credit builder pre-paid cards can also help establish a history of regular payments.

Finally, says Lee, “Be sensible if you are looking to 'repair' your file by using credit. Improving and maintaining your credit rating really does take time, dedication, perseverance and discipline.”

Helpful websites:

Sources

[1] Bank of England, 2019. Interest rates and Bank Rate, https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate