Having a good credit score is a vital part of your financial health and for many of us, we only discover the importance of it after making mistakes in our teenage years that then affect us well into our adult life.
Your credit score is used to determine how likely you are to be accepted to borrow money which could be as simple as a mobile phone contract or as large as a mortgage for a new home.
Luckily it’s not always a long road to getting your credit score back in a healthy zone and there are some quick ways for you to build momentum before tackling the bigger issue.
- Understand your Current Situation
First things first, you need to understand your current credit situation. They say ignorance is bliss but this is often the reason people get their credit score in a bad position, to begin with. The first thing you should do is gain access to your credit file, this step is free and all you need to do is sign up to Experian or Clearscore and follow their sign up process.
This sign up process is so they can locate your existing credit accounts and other financial data leading to the overall score at the end. The number is updated each month so you can regularly log in to see improvements.
Each agency has a slightly different methodology for formulating a credit score so they will slightly vary but the trends will often remain true. Once you have access to the report, the main things you’re looking for are inaccuracies or mistakes which could cause negative impacts on your credit score.
For most people, your credit file will confirm all the things that you probably already knew, especially if you’re now trying to increase your credit score. But this is the first step so you can now take the simple steps to increase it.
2. Start borrowing
Now, this may scare people who aren’t used to taking out credit or have had bad experiences in the past. However, the best way to increase your credit score is to borrow on credit and pay it back on time.
This is typically better suited to those who have never taken out credit however even if you have bad credit there are still options out there. The main component of your credit score is proving to financial institutions that you can make regular repayments at the correct time each month.
For this reason, you can take out a starter credit card. Typically, these cards will have high APRs which makes it incredibly important to be strict and make repayments on time each month. You don’t have to have a huge credit limit, to begin with.
Over time, you’ll even see progress being made because your bank will slowly begin to offer you greater credit limits without you even asking. That’s when you’ll know your credit score and trust is increasing.
3. Stop Missing Payments
Building credit is almost identical to building trust to show that when you take out credit that you can be relied on to make the required repayments at the right time. For many, this is easier said than done and this is often why you’re in this position in the first place.
The key to making repayments on time is to have a budget in place each month so you can see exactly where your money is going to ensure you have enough for your bills. As soon as you miss a couple of payments this can quickly snowball and end up with a default on your file.
So, if for example, you have a mobile phone bill you should set up a direct debit for the same time each month so you won’t forget. If you have a credit card then you should set the payment to clear in full each month or at least pay the minimum.
Not only does making payments on time help your credit score but you’ll also avoid any late fees which will just add to your existing debt, making it even harder to pay back.
If you’ve tried several times to get a starter card and you keep being rejected, then it’s important to stop applying for a few months because each hard search can negatively affect your credit score. Try some other credit building alternatives and try a few months later.
4. Register to Vote
One of the fastest ways to increase your credit with very little effort is by registering to vote. This will give your score a help increases and be sure to register with your new local council each time you move home.
5. Manage your Credit Requests
Managing how much credit you’re applying for will help to improve your score. You need to be hyper-aware of your current situation when deciding how often to apply for credit, which is why it’s so important to sign up to a credit monitoring service like Experian, to begin with.
If you have bad credit, then not making too many credit applications will slowly begin to improve your credit score. Each time you make a request for credit this causes a hard search to be placed on your file. This isn’t too detrimental if you’re new to applying for credit but if you have a poor history of credit then this will be a negative sign to future potential lenders.
However once you’ve been accepted for a level of credit then once you have a few months of on-time repayments, you should begin to regularly request credit limit increases. Most credit card companies allow you to do this only in just a few clicks.
Increasing your credit score also helps to increase your credit utilisation ratio. You need to be smart about this so don’t instantly request a credit increase on a new card because this will often be a straight decline.
If you already have an existing credit card with a history of repayments then most banks won’t require a hard search. However, you can check this before you apply.
6. Maintain a Low Credit Utilisation Ratio
The credit utilisation ratio is an important metric used to determine your credit score. This ratio is a calculation of the amount of credit you’re currently using divided by the overall amount of credit that you have access to
For example, if you have a total credit limit of £10,000 and you’re currently using £2,000 then you have a utilisation of 20%. This is an ongoing ratio so it updates your credit file each month.
A high ratio will be an indicator that you could be potentially living above your means because you need to use a high amount of your available credit each month. It’s recommended to keep utilisation below 30%.
The best way to keep your credit utilisation under control is to not suddenly cancel cards even if you’re not using them. If you cancel a card, then the credit balance will not count towards your ratio, making it higher.
You should also continue to budget your money effectively so you don’t need to charge so much of your monthly spending to your credit cards. This is often easier said than done, but once you start to reduce your debt this frees up additional money.
As you build your credit, you can then apply for a larger credit limit which will then improve your credit card utilisation ratio.
7. Avoid Frequently Moving
Moving home often isn’t avoidable but your address allows companies to create a link with your financial history. You should ensure that you keep it up to date on your file.
Any prospective lenders would like to see that you have stability in your life so if you’re moving every 2 months then this is a negative sign which could make them think that you’re having an issue paying rent.
8. Check for Errors on the Report
Around 30% of people in the UK have never checked their credit reports. This means a large number of people don’t know their current credit health which means they don’t know how likely they are to be approved for financial products.
Not only this, but they also won’t be able to spot any errors that could appear on your file. These errors can range in severity from a simple address error to having a large error such as an incorrectly flagged missed payment.
It also allows you to see if anyone has fraudulently applied for products or services in your name. It only takes 5 minutes to sign up for a credit checking service so is worth your time.
If you find errors on your report then you need to flag it directly with the lender listed allowing you to dispute the issue.
9. Moving Forward – Keep Tabs on your Credit Score
Okay so now you’ve increased your credit score and it’s looking healthy the job isn’t over. You should ensure that you’re checking it each month even just for any errors that may be on your file so you can maintain your new higher credit score.