In today’s world, there are a few things that have changed, are changing even more, and we also need to stay more aware of. And one of those things is our credit scores.
We should all know our credit score and monitor it on a regular basis.
Why you may ask???
Credit files and credit scoring is used more today for other things then just determining your eligibility for a loan or credit card.
Credit score can be used to rate insurance policies, get hired for jobs, let a place to live, and even in our romantic lives.
Many a perspective partner or spouse has done a background and credit check prior to dating or beginning a romance with a potential spouse or partner.
Know Your Credit Score
You need a baseline to start with, and knowing your credit score at present, is that baseline. From there you can monitor your credit score, and improve it.
So what is a good credit score?
Different credit bureaus have different scoring guidelines, and different tiers of scores.
There are three major credit bureaus in the UK:
- Transunion, formally Call Credit
Each of these credit bureaus can score you from the low hundreds, which is a poor credit score, to some score as high as 999.
For some credit bureaus 700 is an excellent score, for some in the 900’s.
What Makes Up My Credit Score?
What Makes Up My Credit Score?
Credit scores are a numeric score assigned to your credit history based on five (5) factors. These scores are used in determining someone’s eligibility for credit, and the ability to repay a loan, and also in other aspects of our lives, such as insurance and in some instances a job.
The five (5) factors used to make a credit score are:
- Payment History: This is how we pay our bills and debts and makes up 35% of our credit score.
- Balances, How Much We Owe: The amount of debt we have makes up 30% of our credit score.
- How Long You Have Had Credit: This makes up 15% of our credit score and is the length of time you have been in the credit bureaus, the length/timeline of your credit file.
- The Types of Credit You Have: The types of loans you have, credit cards, car finance, mortgages, this makes up 10% of your credit score.
- New Credit: When you apply for a loan or any form of credit, an inquiry is made on your credit file. This inquiry leaves a “footprint”. This factor makes up 10% of your credit score.
What Factors Can Cause My Credit Score to Drop
In looking at how to improve your credit score, we need to look at what can reduce or hurt your credit score.
Remember a high credit score is ideal, the lower the number, not ideal.
This is important to know as those with high credit scores can receive better offers on lan and other forms of credit, and lower interest rates. A lower interest rate on a loan will save you money in the long-term.
In looking at the five (5) basic factors that make up your credit score, here are some reasons your credit score could be reduced:
- Late Payments: How you pay your debts accounts for 35% of your credit score. A few late payments, or an account in arrears, will drastically lower your credit score.
- How Much You Owe: If you are “maxed out” on your credit cards, or have large loans, and have used up the majority of your credit lines, this will damage your credit score. And as this factor makes up 30% of your credit score, having a lot of debt, and then being late with payments or in arrears, or in default, will reduce your credit score faster than a landslide.
- What Forms of Credit You Have and Use: Loans such as a mortgage or even a credit card, are assigned a higher value then a payday loan, guarantor loan, or a doorstep loan.
- Footprints/Inquiries/Applying for New Credit: As mentioned, each time you apply for new credit an inquiry or footprint is placed on your credit file, showing you have applied for credit. Too many of these in a short period of time, will reduce your credit score.
There are two types of footprints:
- Soft: Soft inquiries or footprints do not affect your credit score. These can be pre-approve or pre-qualified offers you receive, or you reviewing your own credit file. If an employer wishes to see your credit file, they can but only with your permission, and this is a soft inquiry, and does not affect your credit score.
- Hard: These inquiries are when you actively apply for credit, and do affect your credit score.
While different banks and lenders use different scoring models, these five factors are the large ones, however, some lenders can also look at the following:
- Using a credit card for cash withdrawals
- Moving house too often
- Changing jobs too often
- Who you have joint accounts with
- Your social media accounts and posting and who you are friends with
So How Can You Increase or Improve Your Credit Score???
Pay Your Accounts/Bills on Time!
If payment history is 35% or the lion’s share of what makes up your credit score, then late payments and defaults will reduce it very quickly.
Limit Your Use of Credit this also ties in with Limit Footprints.
Do not be applying for loads of credit, just because you receive an offer in the post for a credit card does not mean you need to apply for it; even if it states pre-approved or pre-qualified.
These pre-qualifications may only be offered due to a preliminary or cursory check of your credit file, or a “soft inquiry”. When you actually apply then a “hard inquiry” is placed.
Again, too many of these hurts your credit score.
The Rental Exchange
The rent we pay is usually not reported to the credit bureaus, however, there is a programme that allows landlords to report rent payments to aid the tenant in creating or helping their credit score.
The Rental Exchange benefits both tenant and landlord. Tenants want to pay their rent on-time as it can improve their credit, which means landlords get their rent on-time.
Experian Boost is a new way to help improve your credit score, using bills and payments you make each month, that may not be reported to the credit bureaus.
You may have a Netflix account you pay each month, your Council Tax payment, (which is not reported to any credit bureaus), other bills, and also if you are regularly putting money into a savings account.
All these factors can be used to improve/increase your credit score.
Watch Credit Limits/Spread the Debt/Balances
If you will note from the five main factors that make up your credit score, balances or amounts owed makes up 30%, which is the second largest percentage or factor used.
Keeping your credit limits down, and looking at your debt to income ratio, and keeping it at 35% or less, in most instances, much less, will help your credit scrore.
You can also spread the balances out over multiple accounts to reduce your balances, and help your credit score.
If you have £3,000 on a credit card, with a £4,000 credit limit, you are getting high or close to your credit limit.
If you can spread that £3,000 over 2 or 3 accounts, your overall debt ration looks better as it is not all on one account, and close to its credit limit.
Two or three credit lines only using 20% of their credit limit, looks better than one account using 60% or more of its credit limit.
The Internet, and in particular Social Media, are a “whole new realm of mischief” these days.
And Social Media is in the tick of this mischief.
Using Facebook and other social accounts, people report the breakup of a relationship, where and when they are going on holiday, photos of them, their homes, selfie this and selfie that.
Who their friends are, and who they may be “feuding” with.
Some lenders, and even some employers, will use Social Media as a way to determine and learn more about someone, and that can be in making a decision as to grant credit or not.
Correct Errors and Omissions
We need to review our credit history on a regular basis, to see if there are any errors or omissions. Not all creditors report to all three (3) credit bureaus, but if we have a major loan or credit card and it is not reported, we can inquire with the lender and credit bureau as to why it is not reported.
If there is an error or mistake on your credit file, you can either us the credit bureaus system to report it and have it corrected, and also contact the creditor directly.
Your credit file and history must be an accurate report of how you have paid your accounts.
That can be good or bad, depending on how you pay the accounts.
If you are not already on the Electoral Role, get on it!
Banks and lenders use this to verify you are who you say you are, and that you live at the address you state you are living.
What is Not Reported on My Credit Report?
There are some things not reported on your credit file, these things are:
- Your Income
- Savings Accounts
- Rent History: Unless reported through the Rental Exchange
- Some Small Loans: Such as doorstep lenders, loans between friends and family
Armed now with all this knowledge and detail, we all should be able to increase our credit scores, even if just a few points.