Money tips: How to improve your credit score
A credit score is a number that reflects your ability to pay credit back. Lenders – such as banks, mortgage providers and credit card companies – analyse your credit history when they calculate your credit score. The higher your credit score, the better chance you have of being accepted for a rental property, as well as loans, credit cards and mortgages.
Lenders use a credit score to show them the level of risk they face in lending to you. If you have a poor credit score, these organisations are much less likely to lend you money.
If you're living in rented accommodation and saving up a deposit to purchase your own home, you might find your efforts unsuccessful if you have a poor credit rating. Before you even consider buying a home or applying for a mortgage, you need to ensure your credit rating is strong.
How do you check your credit score?
In the UK there are three main credit reference agencies which allow you to check your credit score – Experian, Equifax and Callcredit. You can check your credit rating online in a few short steps, with the websites assessing your ability to pay back any money you might borrow. The service is often free with services such as clear score, or certainly for a trail period with services like Equifax which involve a small charge.
How does it work?
Lenders analyse your borrowing history whenever you apply for credit, looking closely at how you repay money you've borrowed. Your credit history will show how much you owe on credit cards and whether you've missed payments or paid late in the past. Your credit history also takes into account car financing, mobile phone contracts, and monthly insurance payments.
Using your credit history, the lender will then decide if they want to lend you money or not, with each lender operating with slightly different criteria. If you're looking for the best credit card, loan and mortgage to suit you and your situation, it's best to shop around to ensure you're getting a suitable deal.
What's a good credit score?
Taking Experian as an example, its free tracker runs from 0-999, categorising credit scores in the following way.
- Excellent – 961-999
- Good – 881-960
- Fair – 721-880
- Poor – 561-720
- Very Poor – 0-560
Those with excellent credit scores should expect to get the best rates on credit cards, loans and mortgages (although this isn't guaranteed), while those with good credit scores are likely to be accepted for most credit. Those with fair credit scores might secure reasonable interest rates, but credit limits are unlikely to be high.
Those with poor credit scores may be accepted for credit, but this is likely to come with higher interest rates attached, while those with very poor credit scores are far more likely to be rejected for most credit products.
What can be done to improve a credit score?
If you have a poor credit rating or one that could be higher, there are numerous steps you can take to improve your credit rating:
- getting yourself on the electoral register (if you're not already on it)
- clearing any debts you have
- paying all bills on time
- paying off your credit cards each month
Lenders like certainty, stability and security, particularly when it comes to mortgages. So, if you have desires on buying a home in the future, paying back (or off) what you owe on a regular, consistent basis is likely to go down well in their eyes.
When deciding whether or not to grant a mortgage application, lenders will closely study your credit history and if they see that you regularly meet your financial commitments they are more likely to lend. A good credit score helps to build trust and also increases your chances of getting the best rates.
Does paying rent on time help your credit score?
Back in October MPs held a debate in Parliament about whether rent payments should be used as part of credit scores to help tenants looking secure a mortgage. The debate was triggered when a petition started by Jamie Pogson, a Plymouth construction worker, attracted more than 147,000 signatures.
At present, credit agencies do not routinely take into consideration rental payment history when it comes to calculating credit scores, which could be to the detriment of private tenants looking to purchase a home. Currently, tenants can find it difficult to access a mortgage even if they have a long history of rent being paid on time and in full.
Some companies, such as PAID & CO by HomeLet, already have systems in place that allow landlords or letting agents to report payment histories to credit reference agencies, while CreditLadder is a third-party service which works in conjunction with Experian to enable tenants to pay rent on time to boost their credit score. But there are calls – backed by several industry trade bodies – for this to be made mandatory.
Take a savvy approach
Being sensible with your finances, not getting yourself into debt, paying back what you owe and paying your rent on time will all help to boost your credit score, which will in turn increase your chances of getting the best rental properties, mortgages, loans and credit cards in the future.