Your credit score is a dynamic score ranging from 0 to 999 points and lenders use it to decide whether they should give you a loan. It is a score that highlights your creditworthiness, almost ‘how good you are to lend to’ with a higher score, the better. Being dynamic, it can change constantly based on several factors but mostly how well you have been repaying any debts such as credit cards and loans.
The UK’s three main credit reference agencies of CallCredit, Experian and Equifax keep hold of your credit records and make this available to lenders upon purchase. So whether it’s a personal loan, mortgage or credit card that you are applying for, the lender will run a credit check against your name and having a good credit score is key to being accepted.
Since your credit score can go up and down, you always have the chance to improve it and you can maximize your chances of being approved for loans and getting the best rates which are reserved for those with good credit.
Perhaps you have fallen behind on payments in the past and are now looking to boost your score. Maybe you have just turned 18 and automatically have no credit score and wish to build up a credit rating. Our guide below highlights the most important steps to improve your credit score.
Why is a credit score important?
- Suggest a low level or well managed level of debt
- Can maximise your chances of being approved for loans, credit cards and mortgages
- Key to your financial freedom
- Will give you access to best rates for financial products
- May even help with things like getting a mobile phone
Join the electoral roll
The electoral roll or register is where you submit your name and address to the local council and this will give you the entitlement to vote once you turn 18.
However, credit reference agencies use this data too as a form of verification to confirm that you are a real person and have a physical address. This gives you credibility and lenders are therefore more likely to consider you for a loan if they can see that you are on the electoral register.
Pay your loans on time
The rule of thumb is that if you always pay your loan and credit card bills on time, you will always maintain a high credit score but if you miss repayments, you credit score may fall.
Every time you make a repayment or default, the information is fed back from the lender to the credit reference agency that they work with. It is important that this information is shared so if you make future applications, the lender will have access to real-time information and will know that they can or cannot lend to you on that basis.
For instance, if you have been defaulting on loan repayments and then apply for another loan elsewhere, the lender will be able to see your recent defaults and may avoid lending to you as a result. The data is known as reciprocal since credit reference companies send the data to loan providers and then they can send it back.
Since making repayments on time can improve your credit score, it is sometimes a common tactic used by individuals to boost their ratings. There are specific credit builder credit cards which charge high interest rates, but allow those with bad credit to repay on time and improve their scores. For those first-time buyers looking to apply for a mortgage, it can be recommended to get a credit card and get used to make regular small repayments, to demonstrate your creditworthiness.
In the same way, personal loans including guarantor loans, can help improve your credit score as paying on time will cause the positive information to be sent back to credit reference agencies and your score will improve. It all shows that you are a good person to lend to.
Avoid applying for too many loans
Borrowers should also avoid applying for too many loans in a short space of time as Experian mentions that this can affect your credit score. Every time you make an application for any financial product and the lender runs a credit check on your account, a search footprint will be placed on your file to highlight that the lender has looked at you.
If you generate several footprints in a short space of time, it makes it look like you are desperate for money, which is an indication that you are not in a good financial position. So if you are looking to improve your credit score, making several applications for loans and credit cards should not be on the list.
The credit companies state that it is pretty normal to have around 12 credit searches throughout the year, but if you have 20, 30 or 50 – this raises alarm bells. Be conscious of applying through dodgy looking broker sites, especially in the payday sector since one enquiry could blast you out to several companies at once, giving you three or five credit searches in the process.
Close accounts you do not use
One of the factors that makes up your credit file is how much outstanding debt you have open. This also includes credit cards and loans that you no longer use or could pay off. So to reduce the amount of outstanding debt, simply close those store credit cards and other accounts you do not use. If you have any long-term personal loans, see if you can close the account by repaying early and you will probably save money for doing so too.
Consider the financial link with your partner
As soon as you set up a joint bank account or mortgage with your partner or spouse, they become financially linked to you. If they have a history of bad credit, bankruptcy or CCJ, this could impact your credit score and affect your chances of being approved for loans in the future.
How credit searches work with guarantor loans
In terms of the guarantor loan application, a hard search footprint is usually placed on the main borrower who applies for the loan and checks their credit history. This hard search footprint will remain on their credit file for at least one year. For the person they choose to be their guarantor, there will usually be a ‘soft search’ – which allows the lender to review their credit report without showing up on their credit file and disappears quickly after. This is only fair seeing that the guarantor never really applied to begin with.
In terms of repayment, the idea is that applicants with poor credit may get access to finance because they are leveraging the good credit score of their guarantor. It is based on the idea that if your guarantor with a strong credit history trusts you, well, we can trust you too. So finding a guarantor with a good credit report is key and is why guarantor loans bad credit products are popular for many.
Want to see your credit report?
The Government states that a £2 statutory credit report must be available for all. Elsewhere, you can apply with the likes of Noddle or Experian to receive a free 14-day or 30-day trial and thereafter you can pay a few pounds a month to have regular access to your report and also receive alerts for any credit searches or missed repayments that could be affecting your score.