What is a credit score?
Your credit score, or rating, is central to a lender deciding:
- if they will consider lending to you
- how much they would be prepared to lend to you
- what interest rate they’ll charge on your loan
What is your credit score based on?
A credit score is based on your historic behaviour; lenders use algorithms, to predict your future financial behaviour from the past data they hold on you.
Put simply, if Cathy lends John £20 and he doesn’t pay it back, the next time John asks to borrow money, Cathy’s going to say no and if Cathy’s shared her experience of John’s behaviour with her friends, then they’re not going to want to lend to him either.
That’s a credit score, in a nutshell.
How can I improve my credit score?
Lenders want to see you’re reliable
The vast majority of us are borrowing money, the most obvious example being a mortgage, but there are so many other contracts we have needing regular payments:
Rent, if you’re a tenant, electricity, gas, water, credit cards, store cards, monthly mobile phone contracts, gym membership and so on and credit agencies want to see that you have a good track record in meeting these obligations on a monthly basis.
Lenders want to see you save!
It may seem a bit back to front, after all you want to borrow money, so why do lenders want to see you saving?
Lenders want to see how much of the money that comes into your account every month, then goes straight out; so if you can manage to save, it goes in your favour. Doing away with one meal out a month or reducing what you spend on luxuries will boost your score.
If that small sacrifice means you’re lent a larger amount, perhaps at a cheaper rate of interest, it could make a significant difference and be well worth the sacrifice.
Lenders want to be sure where you live
Lenders check the electoral roll to check that you are registered as living at where you say you live, so, if you’re not registered to vote, you’ll have difficulty proving where you live and how long you’ve lived there.
Make sure that you register to vote as soon as you move into a new address, not doing this will mean that many lenders will simply not consider you as creditworthy.
The Credit score hat trick
- Reliability – making monthly payments for utilities, phones etc, on time.
- Living within your means – Not spending more than you earn and saving a little.
- Stability – in terms of how long you’ve lived at your address.
It’s easy to check your credit rating online and you should make sure the details are correct and up to date. The main agencies are Experian and Equifax and remember you don’t need to sign up to a monthly plan to get your credit report, it is yours by right and you should be charged no more than £2 to receive a copy.