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How can I improve my credit rating?

Your personal credit score is a hugely important part of your financial life. It determines whether you can get cheap credit or have to pay a high interest rate – or whether you get credit at all.

And it's not just credit cards, mortgages and loans. Your rating can decide whether you qualify for mobile phone contracts, utility provider switches, hire purchase, car hire and many more transactions.

So if your credit score is bad, you need to start fixing it. Luckily, it can be done, but you do need a degree of patience and self-discipline. And there are a few measures you can take to get it looking better straightaway. Read on for more.

What is a credit score?

Your credit score, or credit rating, is a snapshot of your financial health, or more precisely, how you deal with debt. In the modern world, debt itself is not a bad thing. Think about it:

  • Practically every homeowner has a debt that lasts 25 years or more.
  • Many of us buy our cars, home appliances and holidays on finance.
  • Putting a meal on a credit card for convenience is like an IOU to the credit card company.
  • The average phone contract that gives a ‘free‘ phone is really just a hire purchase agreement over two years – as you’d find out if you tried to cancel after one month!
  • Even turning on the toaster is a type of borrowing, because you pay for the electricity later.

Credit reference agencies monitor how well you deal with that debt, and from that information, decide how likely you are to deal with debt in the future.

In fact, having no debt at all and never having borrowed any money might make you think you’re a very low risk, responsible person (and you may well be), but in the eyes of the credit rating agencies, you’re still a risk because they don't have evidence of good credit management.

Factors that feed the rating

Your credit rating might be mainly based upon your past borrowing history, but there are some personal details they need too.

The electoral register

The most important of these is your proof of identity and address, which is taken from the electoral register. If you get polling cards through the post a few weeks before local and general elections, you’re already on the register. If not, you can apply online. This will be the biggest single thing you can do today to help restore your rating.

Court records

Your legal history will also be considered, especially County Court Judgements for non-payment of bills, debts or taxes. However, any criminal record might be taken into account, although it’s unlikely that things like parking fines will have any impact. There’s obviously nothing you can do about this, but if a CCJ is being declared against you in error, have a look at our piece on having a poor record through no fault of your own.

Court judgements and bankruptcies will disappear off your credit history after a period of time, usually about six years.

Financial history

The way you tend to deal with financial responsibilities (utility bills, loans, credit cards, mortgages, hire purchase agreements, phone contracts, overdrafts and more) will have a big effect on your credit score.

All the organisations that you do financial business with will report to the credit reference agency monthly on how you’re performing. Late or missed payments will count against you, and regular, on-plan payments will count in your favour.

As we said earlier, having no financial history at all is considered a negative factor. It’s actually worth taking out a credit card simply to start creating a pattern of good debt management. If you share a home with someone and it’s their name on the utility bills, consider getting your name added to them or sharing bills between the various occupants.

The only way to fix your financial history is to enter a phase of good repayments to every organisation you owe money to. Their monthly reports will start to turn around your rating, but it will take time.

Previous applications

If you make a lot of applications for credit, this will start showing negatively on your rating. That doesn’t just mean credit cards – it means loans, phone contracts, buy now and pay later deals, mortgages and all manner of lending that doesn't always look like lending.

This can put the applicant in a catch-22 situation because they need credit but the more they apply, the more expensive it gets. But that’s just the way it is, and to keep this element of your score better, only apply when you’ve done your homework, and use tools such as our Card Checker to test your chances of success without leaving a 'footprint'.

There’s more than one agency

Different organisations refer to different reference agencies when deciding on the risk you represent. That's why you might be rejected by a credit card company but accepted for a hire purchase agreement. While the data they request and the way they calculate the score will be different, broadly speaking, a person with a poor record will show on all the agencies, but around the boundaries, they might be accepted by some and not others.

Nobody truly knows all the agencies’ calculations

To prevent people playing the system, and to give agencies competitive advantage, the exact calculations the agencies use and the weight they give to individual elements are closely guarded secrets. All the information on this page is based on what is known for certain in the industry, but some agencies will disregard information that others think is important.

Credit score is not the only deciding factor

Don't forget, when you make a credit application, there's a lot of data in there that will also determine your chances of success, such as proof of income.

Even the state of the economy can have an effect. A weak economy can cause more caution and lead to more rejections, as happened around 2008 when it became very difficult to get credit.

If you've already done business with a particular company, they will probably already have some records about how you've handled money in the past. This will count for a lot if, for example, you're applying to your bank for a loan, mortgage or credit card.

Your credit score is important, but there are still things completely out of your control that will determine whether you get credit – and how much you pay for it. But the things that are in your control can form the basis of building up a healthier score.

Being able to repair your score is proof you can manage your finances effectively, and it's surprising how quickly it can be turned around.