Credit’s a tricky thing. You want to have it available to you but you don’t necessarily want to use it. In this world it’s a necessary evil for so many goods.
If you’ve applied for any kind of credit recently (or in the past), you’ll know that companies assess your application using something called a credit score. It’s basically a number that reflects how likely you are to pay back the credit you’re taking out.
Banks, credit card companies and other lenders all look at your credit score when considering an application for credit; the higher your credit score, the better your chances of having the application approved and bagging the most competitive interest rates.
Your individual credit score is based on a number of factors, such as how much credit you’ve already got (are you a big borrower?), how often you apply for new credit (how often do you need more money/stuff?), and whether your repayments are always on time (are you reliable?).
As a first step and before we even get into all the ways you can improve your score here’s an extra tip for people living in the UK. Being on the electoral roll is taken as a positive by credit algorithms, so make sure you’re all signed up before applying.
Thankfully for people the world over, there are many other things you can do to give your credit score a boost. We’ve put together a list of the 10 most surefire ways to get that credit score in the green and help you tame the waves, or rather the lenders of the credit world.
- Check your credit report is accurate
Much like the three horsemen of the apocalypse, in the UK there are three main credit scoring agencies: Equifax, Experian and Callcredit. Any of these companies will give you a copy of your report if asked. In the US it’s the same, though rather than horseman the proper term for the three is the credit bureaus, they include Equifax, Experian, and TransUnion.
You are entitled to receive a free copy of your credit report from all three of these main credit reporting agencies each year should you desire it. You can head straight to https://www.annualcreditreport.com/ now, to request yours.
With credit report in hand, you’re ready for battle! Or maybe ready to make a cup of tea and have a leaf through, checking for inaccuracies with great concentration. Though be forewarned, your report might be a bit of a surprise if you’ve never taken a gander before. There will probably be a lot of information on past addresses, people you’ve been linked through accounts or that gas bill you thought would go away when you moved house. They never go away…
Go through with a fine-toothed comb and highlight every piece of inaccurate information you find as many small things can affect the lender’s tendency to lend.
Once finished, you’re ready to dispute any inaccuracies with the credit scoring agency/bureau that produced the report.
2. Get a credit card
It may be something your parents have warned you against for years but now is the time to rebel. If you’ve never had credit before (lots of people haven’t) then you have no history with borrowing, this will make it very hard for you to get your sticky mitts on any borrowed money. How will lenders know if you’re good at paying back debt if you’ve never had any?
Get yourself a credit card and start using it sensibly i.e. spend on it then paying it off each month in full. This way you’ll start building a credit history and avoiding any interest whilst doing so.
3. Always pay your bills on time
This is so important. Always paying your bills (credit card balances, utility bills, mortgage, etc.) on time is one of the best ways to improve your credit score. It shows lenders that you are responsible, take your credit obligations seriously, and can effectively manage your finances.
Believe it or not, just one late payment can leave a permanent scar on your credit report and these can take a significant amount of time to remove.
4. Reduce your outstanding balances
This point sounds really obvious, but it’s amazing how many people live with several credit balances spread across a number of accounts. Small balances on credit cards or overdrafts here and there add up. It’s time to get rid.If you’ve got one credit card with a large balance and two or three other cards with smaller ones, concentrate on eliminating (paying off) the cards with the smaller balances first.
5. Don’t close old credit accounts
A big mistake many people make once they’ve paid off a credit card is closing the account immediately. They believe that because it’s paid off and has a zero balance, closing it won’t adversely impact their credit score. The truth though, is that it probably does.
That’s because lenders and credit scoring agencies take your credit utilization ratio (the amount of credit you’re using vs. the amount of credit you have available) into account when assessing any new credit applications you make. By closing an account, you effectively lower the amount of credit you have available ergo increasing your credit utilization ratio. It may all sound rather complex but they key is, keep old credit accounts open indefinitely. Just don’t be tempted to use them in a moment of weakness, and blow the lot on sweets.
6. Don’t make multiple credit applications
Every time you apply for credit, a hard check is listed on your credit report. These checks normally take a full year to drop off and having a bunch of them over a short period doesn’t do you any favours. To a credit lender, this looks as though you’re going around everywhere desperate for money and being turned down – hence the multiple applications. They decide that hey, if no one else wants to lend you money they’re not going to take the risk either!
7. Use any lines of credit you have regularly
Here’s the second reason you keep old lines or credit open… and it’s the same as we’ve said already, using cards in an exemplary manner helps boost your credit score.
Even if you use an old credit card to pay a small recurring bill and then pay the balance off before the end of the month, it still sends a positive signal to the credit scoring agencies. This tells them, or rather the computer, that you are the kind of person who pays their balances off in full each month.
Just be sure you’re not diligently spending the odd £50 and paying it back when you have a few grand out elsewhere – it will probably defeat the purpose.
8. Try to stay put
The urge to move house frequently is one that many people get especially with so many renters out there these days. After all, living in rented accommodation makes it easy to switch from one address to another. The problem, though, aside from the move itself is that constantly moving can give another unhealthy blow to your credit score.
Lenders seem to feel more comfortable if you’ve lived at one address for a significant period of time. It indicates stability and will positively boost your creditworthiness.
9. Seek free debt help
If there are outstanding balances which you’re struggling to pay off, don’t for one minute bury your head in the sand. These amounts never go away – they only grow, unless you deal with them. Avoiding them is literally one of the worst things you can do. Instead, stand tall, lift that chin and tackle your debts head on by utilizing the multitude of free debt help services out there.
If you’re in the UK, here are your first ports of call:
- Citizens Advice
- StepChange Debt Charity
- National Debtline
- Debt Advice Foundation
- The Money Advice Service
And the same for the US:
10. Contact your creditors
If you’re finding it a real struggle to pay credit card balances, your mortgage, and or other debts each month, consider contacting your creditors and seeing if you can agree on a debt repayment plan. While they won’t always agree, you may be surprised how reciprocal they are to your request. They want the money back after all. It’s far easier to come to an agreement than have to chase it down.
They may even agree to freeze the interest on your account which can relieve a huge amount of pressure and have a dramatic impact on your ongoing balances. Tackling your debts and taking control of them will also (eventually) have a positive impact on your credit score.