A good credit rating is essential for securing loans, credit cards, and mortgages in the UK. However, many people don’t realise that their credit rating can be influenced by a range of factors, including payment history, outstanding debts, and credit applications.
Fortunately, there are steps you can take to improve your credit score and increase your chances of being approved for credit. In this article, we’ll explore the key factors that affect your credit rating, the role of credit reference agencies, and provide tips and advice on how to improve your credit score.
What is my credit history?
Your credit history, otherwise known as your credit file, is a record of your borrowing and repayment activities.
It includes information such as your current and previous addresses, credit accounts you hold or have held, the amount of credit you have, your repayment history, and any missed or late payments.
Credit reference agencies gather this information from lenders, banks, and other financial institutions, and use it to calculate your credit score.
Your credit history is a crucial factor in determining your creditworthiness and can impact your ability to obtain credit in the future.
How does my credit history affect my credit score?
Your credit history plays a significant role in determining your credit score. Credit reference agencies use the information in your credit history to calculate your credit score, which is a numerical representation of your creditworthiness.
Your credit score reflects how likely you are to repay any credit you receive, based on your past borrowing and repayment behaviour.
A good credit history, including timely payments on credit accounts and few missed payments, can help improve your credit score, making it easier to obtain credit, such as loans or credit cards.
On the other hand, a poor credit history, including missed or late payments, can negatively impact your credit score and make it harder to access credit.
Additionally, your credit history can impact your ability to open a bank account, as some banks perform credit checks before allowing you to open an account, or if you have a financial link to someone with poor credit, such as a joint bank account or direct debit, this can also affect your credit score.
Who monitors credit scores in the UK?
Credit reference agencies
Credit reference agencies monitor credit scores in the UK. There are three main credit reference agencies in the UK: Experian, Equifax, and TransUnion.
These agencies gather information about an individual’s borrowing and repayment activities from various sources, including banks, lenders, and other financial institutions, and use this information to calculate credit scores.
Lenders and credit providers use credit reference agencies to assess an individual’s creditworthiness and make decisions about whether to lend to them or not.
It’s important to regularly check your credit report from each of the three credit reference agencies to ensure that the information held is accurate, and to take steps to improve your credit score if necessary.
Will a credit reference agency know about my missed payments?
Yes, credit reference agencies will know about your missed payments if they are reported by your creditors.
If you miss a payment on a credit account, such as a credit card or loan, your creditor will usually report this to one or more of the credit reference agencies. The missed payment will then be recorded on your credit file and can negatively impact your credit score.
Similarly, if you go over your credit limits, this can also be reported to credit reference agencies and have a negative impact on your credit score.
It’s important to monitor your credit report regularly to ensure that all information is accurate and up-to-date, and take steps to address any missed payments or credit limit breaches to improve your credit score.
How long will defaulted payments be listed on my credit file?
Defaulted payments will generally remain on your credit file for six years from the date of default.
This means that if you miss a payment and it becomes a default, it will remain on your credit file for six years from the date of the default.
During this time, the default will have a negative impact on your credit score and could make it more challenging to obtain credit or loans. However, as the default gets older, its impact on your credit score will diminish, and it will eventually drop off your credit file altogether.
It’s important to address any missed payments or defaults as soon as possible and take steps to improve your credit score to minimise their impact on your creditworthiness.
What factors are considered when deciding your credit score?
Credit scores work by considering a range of factors that reflect your creditworthiness. These factors include:
Your payment history is the most critical factor in determining your credit score. It looks at whether you have made timely payments on credit accounts and whether you have missed any payments or defaulted on any credit agreements.
Credit utilisation looks at how much of your available credit you are currently using. This factor considers your credit card balances, loan balances, and other credit accounts and compares them to your credit limits.
Length of your credit history
The length of your credit history looks at how long you have been using credit. Generally, a longer credit history can have a positive impact on your credit score, as it shows a proven track record of responsible credit use.
Types of credit accounts
Types of credit accounts consider the different types of credit accounts you have, such as credit cards, loans, and mortgages.
A mix of credit accounts can be seen as positive and can demonstrate your ability to manage different types of credit.
Recent credit applications
Recent credit applications look at how many credit applications you have made recently.
Too many applications in a short period can negatively impact your credit score as it can suggest that you are experiencing financial difficulties or seeking credit that you may not be able to repay.
What is considered a good credit score?
It’s important to note that credit scores and credit score ranges can vary depending on the credit reference agency used and the specific scoring model employed.
While a credit score of around 700 or above is generally considered a good credit score in the UK, some lenders may have different criteria for assessing your future credit eligibility.
It’s also important to note that having a good credit score does not guarantee credit approval, as lenders consider a range of factors when making lending decisions.
That said, maintaining a good credit score is essential for improving your chances of accessing credit and obtaining favourable terms and interest rates.
How to improve your credit score
Improving your credit score can take time, but there are several steps you can take to increase your score.
Here are seven tips on how to improve your credit rating:
Check your credit report
You can’t mend it if you don’t know what is broken. So you need to get hold of a copy of your credit file by contacting one of the two main Credit Reference Agencies. Check it and see if what is counting against you is true.
Pay bills and credit card repayments on time
Late or defaulted payments can have a significant negative impact on your credit score. Ensure you pay bills and credit card repayments on time to improve your score.
Reduce your credit utilisation ratio
Reduce the amount of credit you’re using compared to your credit limits. Aim to keep credit card balances below 30% of your credit limit.
Borrow money responsibly
Borrow money responsibly and only apply for credit when necessary. Too many credit applications in a short period can negatively impact your credit score.
Avoid closing bank accounts and other active credit accounts
Keep your bank accounts and active credit accounts open, as long-term credit relationships can positively impact your credit score.
Join your local electoral register
Registering to vote on the electoral register can positively impact your credit score, as it confirms your address and identity.
Consider using a credit building credit card
Consider using a credit building credit card, which is designed to help improve your credit score. These cards have lower credit limits and higher interest rates, but if used responsibly and paid off in full each month, can improve your credit score over time.
When can I start to get credit again if I’ve had financial difficulties?
A bad credit history will show on your credit record for 6 years, during this time you may find financial institutions will start to give you limited amounts of credit.
Different banks have different policies on who they will have bank accounts for, so it will be just a case of speaking to your local high street banks and seeing whether their policy will allow you to apply.
Please note, if you continue to take credit and not attempt to pay it back then it is inevitable that the creditors you owe money to will chase you for the money and may use court action to do so.
With your agreement, a ‘Notice of Correction’ could be logged against your name with the major credit reference agencies.
A notice of correction allows a short statement to be placed against the person’s credit rating that can give a reason as to why further credit should not be given to them. This will make it harder to take out further credit.