How to improve your credit rating

Your credit rating can affect your ability to borrow money using products such as credit cards, loans and mortgages. If your credit rating isn’t in the best shape there are things you can do to build it up again and fix any problems. Here’s how to do both.

Why your credit rating’s important

Your credit rating is used to help lenders decide whether to lend you money, how much to let you borrow and, in some cases, how much interest to charge you.

Read on to find out more about why your credit score is so important.

Find out how your credit score affects the cost of borrowing.

What impacts your credit rating?

Clearly it’s best to avoid those things that can have a negative impact on your credit rating in the first place. Here are some of the things that may affect it. Take a look and see if any apply to you.

  • High levels of existing debt – banks and credit card companies may be nervous about lending you more as this could indicate that you are financially over stretched.
  • Missing or making late payments on anything from your mortgage, credit card, personal loan, gas or electricity bills will stay on your credit file for six years.
  • If you receive a county court judgment (CCJ) (called a decree in Scotland) for an unpaid bill this will have a serious impact on your credit score. CCJs stay on your file for six years.
  • Applying for lots of credit at once. When you apply for credit it will show as a record on your credit report so it’s better to stagger applications. If you do not intend to actually apply for credit and simply want to compare rates, find out whether the lender can register a ‘quotation search’ on your credit report instead of a ‘credit application search’. Lenders know that quotation searches do not represent actual credit applications, so they won’t have a negative impact on your credit rating in the future.
  • Having credit cards accounts open that you never use. Lenders will look at how much credit is available to you, not just how much you’re actually using.
  • Mistakes on your credit report, which lenders check as part of the credit score process. If there is something on your credit report which is incorrect or that does not apply to you – ie someone may have fraudulently applied for credit in your name without you knowing – contact the credit reference agency immediately to have this investigated and removed.
  • Not being on the electoral register. This is used by lenders to verify that you are who you say you are.
  • Moving home a lot. Lenders feel more comfortable if they see evidence that you have resided at one address for some time.
  • Being tied into any joint form of credit such as bank accounts, loans or mortgages with someone who a poor credit history, known as ‘financial association’, as this will affect your ability to gain credit.

Checking your credit report and fixing any mistakes

You should check your credit report to see if there are any mistakes or if you have been a victim of fraud. You have the legal right to see a copy of your credit report for £2. There are three main credit reference agencies you need to check:

Experian and Equifax offer free 30-day trials of their credit report service but you have to give your credit or debit card details at the time. Just make sure you cancel before the 30 day trial period is up or you could end up paying. The Noddle service offers free access to your credit report for life.

To find out more about how lenders use credit reports and how to check your own report, follow the link below:

Find out how to check your credit report.

How to fix mistakes on your credit report

If you do spot any mistakes, challenge them by complaining to the credit reference agency. They have 28 days in which to remove the information or tell you why they don’t agree with you. During that time the ‘mistake’ will be marked as ‘disputed information’ and lenders are not allowed to rely on it when assessing your credit rating.

You may also speak directly with the lender you believe responsible for the incorrect entry. Credit reference agencies rely on information provided by lenders and often the lender is in the best position to resolve this.

If there’s information on your file that’s accurate but doesn’t reflect your current situation – for example, you got into debt problems when you lost your job but you’re back in work now – you can add a ‘notice of correction’ to your credit report. This is a statement of up to 200 words about what happened.

Find out more about how to correct personal information on your file on the Information Commissioner’s Office website.

How to improve your credit rating – things you can do now

If your credit score is poor or you have no history of borrowing for lenders to see, then there are immediate steps you can take to improve your credit score.

  • Stop applying for credit until you’ve sorted out any problems on your credit file and improved your credit score.
  • Get on the electoral register. If your name’s not on there you will find it much harder to get credit. You can go onto the About My Vote website, enter your postcode to find for your local council, complete the form and return it to your local electoral registration office.
  • Cancel unused credit cards. This also reduces the chances you’ll fall victim to fraud if they were ever to be stolen.

Find out more about managing your credit card account.

How to improve your credit rating in the longer term

If you’ve had debts, you need to show lenders that you can borrow responsibly. In time, this will improve your credit score.

Pay on time

Make your repayments on time and pay off your accounts early if you can. This shows that you are a sensible borrower. If you’re using savings to pay off debts, make sure you keep enough cash in an easy access savings account for emergencies.

Use a credit-builder prepaid card

Some prepaid cards have a credit-building option that can improve your credit score. The way this works is you are ‘loaned’ an amount, usually £60, by the prepaid card company. You sign a credit agreement and agree to pay the card company a monthly fee of £5 a month to repay your £60 ‘loan’.

At the end of the year, providing you have not missed any fee payments, this will be recorded on your credit report as 12 months of successful repayments.

However, bear in mind that all prepaid cards charge fees. For example, you might pay £5 to get the card in the first place, 2.5% on everything you spend and an extra £1 fee whenever you top up. Shop around to see if you can find one with fewer fees.

Find out more about prepaid cards.

Credit-builder credit cards

If you have a poor credit history then there are credit-builder credit cards you can apply for.

Be aware that the interest rates charged are much higher than standard credit cards. Typically, you will be paying over 30% in interest a year so you must make sure you pay off any balance in full each month. Otherwise you’ll get into debt that you may struggle to get out of and harm your credit score even further. Credit limits on these types of cards are typically low.

See recommendations for the best cards to rebuild your credit score on the Money Saving Expert website.

Avoid expensive credit repair companies

You may see adverts from firms that claim to repair your credit rating. Most simply negotiate with any companies that have sought County Court Judgments (or decrees in Scotland) against you. Others claim they can do things that – legally – they can’t, and some may even encourage you to lie to the credit reference agencies. Don’t even consider using such firms.

There’s no reason you can’t improve your credit rating yourself so there’s no point paying someone else to do it.

Find out where to go to get free debt advice.