What’s my number and why does it matter?
Listen up class. We’re not all amazing with numbers. But if there’s one set of digits we’ve GOT to be good at, it’s our credit score. It can make all the difference with our finances.
Well, maybe you’re eyeing up the new (or not quite new) motor in the showroom, or trying to land a mortgage for your first home.
If so, borrowing could help you ace your goals, with banks promising to hand you personal loans below 4% and mortgages below 1%.
But in reality, the average rate people borrow at is a lot higher.
The reason? The best rates are reserved for the beautiful, cleverest people out there…
Only joking, it’s those with the best credit scores. So theoretically, ANYONE can get the lowest interest rates available. Getting interested?
Your score is a number between 1 and 1000 based on a behind-the-scenes assessment of how safe a borrower you will be. In other words, how likely are you to repay on time, or at all?
Lenders use credit reference agencies to research your borrowing history, using various sources. Each fact about you is given points, and the higher your number, the better risk you are.
When you apply for credit, it’s like an exam (eek!) where you need the best marks possible to pass muster.
Sadly, one in five people who apply for cards, loans or mortgages fail the test altogether. So get ready to do some homework.
1 Revise, revise, revise
You can check out your current credit report to see how well you’re doing. It should be easy and free. You can sign up for free membership of a credit reference agency like Clear Score or Noddle to keep tabs on things.
Go over your report with a fine tooth-comb. ls it up-to-date and accurate? Ask for any errors to be changed or removed, and submit a note if there are any special circumstances which need explaining (such as a loan repaid, perhaps after a temporary crisis).
The credit agency is legally required to review any issues you raise. Any negative information should only remain on your record for six years (phew!).
One no-brainer is to check you are on the electoral roll. If not, contact your council. If you are not eligible, the credit reference agency will want proof of your identity and residency. And when applying for a loan, credit card or mortgage, make sure you get the ‘how long you have lived at your current address?’ question right.
If you have had borrowing problems in the past, choose your lender wisely. Some will accept a chequered history, others won’t, while some will actually exclude people on higher earnings. Their websites ought to tell you what they’re looking for.
Finally, draw up a list of lenders who offer a ‘soft’ search online. That means you can fire off fact-finding applications to test the water, without any of them showing up as a nasty red mark in your credit history. Lenders don’t like to see multiple applications in a short time, as it suggests you are failing the exam (even when you may not be!).
2 How to pass the test with flying colours
Get inside the mind of your lender. There’s nothing voodoo about this; just bear in mind that they’ll want to see a history of paying bills on time and repaying your current borrowings. That means staying within agreed limits, meeting those payment deadlines every month, and no excuses about direct debits failing or whatever. And remember, any missed payment means a red mark that stays on file for six years.
Good marks will be awarded for the following: a settled period at the same address; a history of long-term employment; increasing your salary; supplying a landline number; and keeping your bank account in credit or inside an agreed overdraft limit.
Have you ever applied for credit jointly with a partner – or more worryingly, an ex-partner who may not have the most brilliant credit score? If so, you need to take that up with the credit agency and try to disentangle it from your report.
3 Blitz those weak spots
Are you one of those clever/annoying people who open their purse or wallet at the till to reveal a huge collection of multi-coloured credit cards?
You might think it’s fine to take out new cards because you are nowhere near the credit limit on your existing ones. Great, but the banks don’t see it that way.
What they see is a bunch of cards where you could, in theory, go on a spending binge and max out on all of them. Just when you have taken on a new loan. Hmm…
That may not be your plan at all, but you can’t prove it. One strategy is to close down cards that you really don’t need any more, streamline that wallet, and forget about card envy. On cards you cannot cancel, get your credit limit reduced to the lowest level you can.
Are you hoping to find a cheaper loan to pay off older, more expensive ones? If you have headroom on your credit ceilings, ask your current lenders to bring down those limits. If you owe your bank, think about asking them for a ‘consolidation’ loan. Use it to refinance only your high-interest debts at a lower rate, while keeping up payments on the lower-interest stuff.
4 Are you ready to take the credit exam?
Are you actually ready to borrow what you are looking for? Or might you be kidding yourself that you can take on all that new credit without working on your budget behind-the-scenes?
Your income could look too weak to support a chunky new outgoing.
There are three options. Let’s not suggest increasing your income via a lottery ticket - although that would be nice. You could borrow less, though that might torpedo your plans. So why not try reducing your spending?
Discover the joys of budgeting (yes, there is such a thing!), where you review where the money actually goes each month. Behavioural psychologists have found that many of us actually get as much of a kick from finding savings as we do from spending. Use old-school pen and paper or a specialist app to note down all your spending.
Set limits for each area. Are there any luxuries that can be pruned right away?
By doing this, you are on the way to building a stronger financial profile and a higher credit score. The only drawback is you may want to put off that credit exam for a few months - until you feel financially ready.
But remember - it makes sense to borrow only when you really need to. Lesson over!
(P.S. You can learn more about budgeting in our article on The basics of financial planning.)