What is a poor credit score?
Your credit score is a figure used by credit reference agencies (CRA) to help give lenders an overall view of how you manage money. As there are three CRAs, which all score differently to each other, there’s no such thing as one uniform credit score.
This means that if you've been rejected for credit with one lender, there’s nothing to say that you won’t be accepted by another. But it’s important that you don’t make several credit applications in a short space of time as this can put lenders off.
A less-than-ideal credit score could be a result of a range of things, from difficulties making payments to a lack of experience with borrowing – also known as a thin credit history.
What affects your credit score?
Some of the most common reasons for a low credit score include:
1. Missed payments
Missed or late repayments mean that you are in breach of your credit agreement, which can have a significant impact on your credit score.
If you’re struggling, then contact your lender as they may be able to discuss alternative payment plans.
Remember, this goes for all credit accounts, including credit cards, store cards, loans, mortgages and some mobile phone contracts. However, lenders will look at the bigger picture, so one missed payment alongside regular ones may not be looked upon as negatively as consistently missing payments over a long period of time.
2. You’ve defaulted or got a CCJ
This means the lender has closed your account with them and is taking further action to reclaim the money owed. They are a last resort for lenders and will usually be done when you've underpaid or missed payments on 3-6 back-to-back occasions. As a first port of call, lenders will usually try to get in touch with you to work out a resolution first.
If a CCJ or default is recorded on your credit file, it will stay there for six years and will lower your score. The good news is that this lessens over time, as long as you manage your credit responsibly in the meantime.
3. Financial associations
Have you ever had a joint credit agreement or bank account with another person or acted as someone’s guarantor? This is known as a financial association, and any financial mistakes they have made may also be attributed to you.
You can get a notice of disassociation if you no longer have a financial connection with the person. After this, you’ll no longer be financially linked.
4. Mistakes on your credit report
Inaccuracies on your credit report can mean your credit score is lower than it should be.
It’s a good idea to regularly check your report with all three main credit reference agencies to make sure everything is correct. If you do think there is an error on your report, you can contact the agency directly to dispute it and ask for it to be removed or corrected.
5. You’re not on the electoral roll
Lenders want to be reassured you are the person you say you are. Being registered on the electoral roll is one of the best ways for your identity and address to be proven.
It’s easy to get on the electoral roll. You can do it online in just a few minutes, and doing so can even boost your credit score.
If you can’t get on the electoral roll (for example if you’re not from an EU or Commonwealth country), you can register your proof of address with the credit reference agencies independently using a UK driving license or utility bill. Contact the agency directly to find out how to do this.
6. You have little or no credit history
If you have no record of handling credit previously, lenders have no evidence that you can borrow responsibly. This is referred to as having “thin credit” and can give you a lower score than you’d like.
Your score is worked out based on your credit history from the past six years, and periods of inactivity will reduce the active level of repaying credit on your account. It also only goes off any borrowing in the UK, so if you’ve been living abroad for an extended period of time this also translates as inactivity.
If you’ve only recently started borrowing or you’ve been inactive, you could help build a positive credit history by taking out a credit-building credit card. But just make sure you pay back the amount in full each month to get the best chance of boosting your credit score.
7. Spikes in credit usage
How much you borrow also impacts your score, as this gives a clear picture of your affordability. So, if you have suddenly spent more on a credit card, say buying a raft of Christmas presents or booking flights, this can cause it to drop.
This is based on your credit utilisation ratio. This is the percentage of your available credit that you are using, so if you suddenly spend £750 on a £1500 credit limit, and you previously only owed £150, you’ve gone from a 10% credit utilisation to 60%. Exact figures on the ideal percentage you should use vary, but all the figures sit between 20%-30%.
8. Closing an old account
Closing old accounts can also impact your credit utilisation. This is because it takes into account not just how much you owe on one account, but how much credit you have available overall. So, if you’ve recently closed an old account, this may have caused a credit score drop.
Confusingly though, it’s not always a good idea to keep old accounts open either. Some lenders look at the total credit available before making a decision, so a credit card you never use will add to that figure and potentially make you look too reliant on credit.
9. Multiple credit applications
Applying for multiple sources of credit in a short space of time can harm your credit score, as it gives lenders the impression that you’re desperate for money.
Try to restrict your credit applications as much as possible, using soft search eligibility checkers before you apply for credit to check your chances first.
10. You’ve only got one type of finance
The variety of debt sources you have is also important. Successfully managing an overdraft, mortgage, credit card and car insurance demonstrates an ability to handle credit well, so if you’re only paying one type of finance, your credit history may not be as detailed and positive.
11. You’ve taken out a mortgage
Have you recently taken a mortgage out? This can cause your score to drop, because your ability to afford debt can be viewed differently as a consequence.
The good news is that this drop is likely to be temporary, and a mortgage will soon be a positive factor on your score. Regularly making repayments on time will showcase financial trustworthiness.
12. You've chosen the wrong credit card
Not every credit card will be right for you, and it’s important that you go for one that will help you stay on top of your repayments. That means choosing a balance and interest rates that suit your situation.
To avoid picking the wrong credit card, facing fees and potentially harming your score further – be sure to shop around for the best card for you.
How can I clear my bad credit?
Your credit score will naturally shift and fluctuate over time, based on how you handle your existing credit and the changing circumstances of your finances.
Sudden temporary drops in your score are often nothing to worry about and even the most serious of mistakes are repairable with time. You can start making positive changes to your score today by following these simple steps.
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Your credit score could improve if you pay on time and stay within the limit. Not doing so could harm it. Intelligent Lending Ltd (credit broker). Capital One is the exclusive lender.