Your Credit Report Part 2 - Improve Your Score
Now that we have dispelled some of the myths surrounding your credit report, the next step is to take action to actually improve your score.
One thing to stress about improving your credit score is that sadly there is no quick fix approach. Regardless of the slow nature of the process, it is important to take action to improve your score and eventually enjoy the benefits set out below.
Benefits of a good credit score
Lenders will see you as credit worthy and pose less risk of making repayments and as such will offer you loans at lower interest rate
You are more likely to get more of your loan request accepted across mortgages, car loans, credit card etc
You are also more likely to be offered larger credit sums/limit which gives you flexibility to manage your finances better
Having access to loans at lower interest rate is one of the key tools required to tackle bad debt amongst other aspects of your personal finance. Therefore let's explore ways to improve your credit score and hopefully get you to a stage where you can enjoy lower rates on your loans.
Great! Let's work through the steps to improvement below.
Step 1 - Electoral register
Always remember to register on the electoral roll where you currently live. Such information helps lenders validate details such as your name and address. If you are not on the electoral roll then you are pretty much falling at the first (easy) hurdle.
Step 2 - Paying bills
This seems like an obvious one but missed or late payments are actually main reasons for most poor credit score. We highly recommend that your bills should all be paid through direct debit so that you do not forget to pay them. Some providers such as energy companies also give you a discount if payments are made by direct debt. Besides, nothing like timely and reliable payment of bills to give lenders the confidence that you can meet any loans or credit given to you. That should naturally lead to a higher credit score.
Step 3 - Pay off debt
Aim to pay off your debt as soon as practically possible but also remember to keep an emergency fund before you go on your debt destruction mission. Yes it's also very tempting to play zero percent credit card round-robin and continue to transfer your debt round. This does not improve your score in the long run so tackle does debt now.
Step 4 - Credit Utilisation
Credit utilisation is the amount of credit or debt you owe divided by total debt (credit limit) available to you. So using your credit card as an example. You have outstanding debt of £1,500 and your credit limit is £7,500. This is a credit utilisation of (£1,500 divided by £7,500) 20%. The lower your credit utilisation the better. If possible keep it below 25%.
Step 5 - Improving from a default situation
Ok ok the above is all well and good to help improve my score but what if I have a default registered on my credit report. It is important to note that default is not based on how much you owe. A few pounds if not repaid at the right time will lead to a default. Which is why we keep stressing that payments should be automated to protect you against missing a payment.
If possible, avoid a default at all cost as once it goes on to your report is stays there for six years. Once six years is over the default cannot not go on again but the lender can still take you to court and register a Count Court Judgement against you!
So how do you improve your credit from a default situation?
If you believe that the default is not accurate then obtain your credit report (can be done for free) to see your default and raise an issue with the credit reference agency
The credit reference agency will then check again with the lender
Well, if it’s not an error then the default stays on your report. Do not despair, get down to work and focus on paying off what you owe. Even if default is still on your credit report, the good news is that cleared payments will be marked as ‘satisfied’ on your credit report, which looks better to lenders
One of the credit reference agency, Experian also gives this tip, "Consider asking us to add a note to your credit report to help lenders understand why you got into debt (e.g. redundancy or long-term illness)"
We have seen the steps above work for so many and we hope you can start your own journey to improvement now. If you do require a bit of hand holding and additional support with financial education then have a Money Chat with us.