There’s a new decade looming, so it’s the perfect opportunity to get your finances fixed and improve your credit score for good.
New Year, new you. We’re not just approaching the end of a year, but also a decade, which means that there’s no better time to start work on improving your credit score.
A healthy credit score opens you up to numerous life-changing possibilities, preparing you for any future financial decisions and situations you may find yourself in. So keeping on top of it by performing some basic credit housekeeping is essential to put you in the healthiest possible position.
We’ve pulled together seven things you can do to help bolster your score.
Check your credit score at all three credit reference agencies
The best way to start improving your score is to understand why it is the way it is in the first place. There are three main agencies for maintaining credit scores in the UK, Equifax, Experian and TransUnion (which used to be known as Callcredit), and all of them have ways in which you can check them for free.
Once you’ve got your reports, it will alert you to things you’ve been doing well with your finances and perhaps things you haven’t. So continue doing the right things and stop doing the ones that are damaging your score.
Also, if anything looks incorrect you can apply to each agency to get mistakes removed or corrected. This can include incorrect addresses, accounts you don’t recognise or mismatched personal information. If after they have looked at it and they have sent a final response letter (this will mean they accept or reject your claims), if you are still unhappy with their response you have the right to complain to the Financial Ombudsman.
Sign up to the electoral roll
With a general election looming chances are you are already registered on the electoral roll. But if you’re not, or you’ve recently moved home, then make sure you sign up sharpish.
This will improve your score and for certain types of lending, particularly mortgages, being on the electoral roll is essential for you to even be considered.
Optimise your credit utilisation
One of the simplest ways to get a better credit score is to work on a better distribution of your credit. By this, we mean making sure you are not maxing out your accounts, but instead are spreading your borrowing across your accounts, reducing the percentage you have used of your potential credit. This is known as your credit utilisation ratio.
Here’s how it works: If you have a credit limit of £1000 and owe £500, then you have a credit utilisation of 50%. If you have another credit card with £900 owed on a £1000 limit, that’s 90% on that account but it’s 70% of your overall debt (£1400 owed on a £2000 overall limit). As credit scoring ranks your credit utilisation on both individual accounts and your overall debt, it would be a good idea to focus on paying off the one with the higher percentage used first.
Generally speaking an optimal amount is 20-30% according to experts, which is what lenders generally perceive as ideal. Anything from 30-90% won’t damage your score but may make you less likely to satisfy lender’s requirements, with anything over 90% potentially damaging your score. You can read in more detail about the optimal amount you should have on your credit card here.
Whilst managing your credit utilisation is great for your credit score, it’s also important to remember your own personal circumstances. Make sure you have enough credit available for an emergency, but not so much you’re going to be too tempted to spend unnecessarily.
Have a spring clean of your accounts
Your credit score is a complicated beast which is based on both your credit history and your current credit situation. Because of this, it’s a good idea to make sure you have a healthy balance of older accounts with a longer positive credit history. So surely keeping open older accounts will show this, as well as help your credit utilisation?
Well not always, because there are good reasons why it’s important to close old accounts. Having inactive accounts may increase your available credit, which lenders might perceive as being too high to offer you any more money to borrow.
It’s also a good idea to assess whether your current credit accounts are the best you can have. Balance transfers might reduce or even eliminate your interest charges for a set period, which can help you get out of debt faster. Whilst credit applications can cause your score to drop temporarily (more on that below), reducing your debt in the long term will help your score improve.
End any financial associations you no longer need to have
Have you taken credit out with someone else before or had a joint bank account? Whether it’s a business partner or an old relationship, if you are still classed as being in a financial association with someone then any negative factors from their credit history can also infringe on your ability to get credit in the future.
This is a little complicated, as it doesn’t actually lower your score. But lenders can look into their past, and may view it as too much of a risk to offer you finance when you may be tempted to use the credit they provide you with for your previous financial associations.
Plan your credit applications
Your credit score is affected by the amount of hard applications you make. Every time you make an application it is added to your credit file, and lenders may perceive multiple credit applications within a short period of time as evidence of you mismanaging your finances. This can damage your score for up to six months.
It’s for this reason you should always soft check your eligibility beforehand, as this won’t be recorded on your file. Then if you are likely to be accepted you can make a hard application, as only one application in any given time frame won’t damage your score. Experian advise that a “good rule of thumb is no more than one application every three months”.
You should always look to plan these out as much as possible, so as not to break that rule. Remember, it’s not just a credit card application that can cause lenders to run a hard check on you. They can also be done if you are switching car insurance providers and paying monthly, getting a new mobile phone contract or increasing your overdraft.
And plan what you want credit for
It’s not just about knowing when you are applying for credit, you also need to analyse what you are going to need the money for.
If you are looking to get a mortgage within the next year how you approach money is extremely important (check out what credit score do you need to buy a house). It’ll influence the way you save (particularly with ISAs) and also the way you spend. Among other things, mortgage providers generally are averse to people who are consistently in their overdrafts, so you may need to plan to move out of that more than lowering your credit utilisation on credit cards.
If you’re hoping to buy a new car it may be that a loan is better suited to your needs, so there will be different things you need to do to make that more likely. Whatever you plan to borrow money for next year it’s a good idea to do a soft check with your likely sources of credit first (you can QuickCheck for our credit card here), and then you’ll know if you are eligible or not. If it’s the latter, you can then make the necessary changes to get things moving in the right direction.
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