Your credit score directly affects your ability to secure loans, credit cards, and other lending services. Knowing how to build a good one is an invaluable skill for all, since we all want access to the best lenders, with the best interest rates, on the best terms.

Your credit score (or rating), is determined by the data contained within your credit report (or file). This report tracks your spending habits, such as how you spend, how you save, if you borrow, and subsequently, if you pay borrowed money back on time.

How does it work?

Your credit score number will be between 0 at the lowest, and 999 at the highest. Different scores are divided into categories. If you are within the top two categories- good (881-960) and excellent (961-999)- then your chance of success in a credit application is very high. In contrast, if you get a score of fair (721-880) or below, then your prospects are very limited.

However, it is important to note that this number often differs from lender to lender, dependent on their specific criterion for assessing prospective clients.

The main things that your score will determine for lenders will be: whether to lend to you; how much to lend to you; and how much interest to charge you.

Checking your Credit Score

The three main credit scoring agencies in the UK are Experian, Equifax and TransUnion.

These agencies hold your financial information, which is then used by lenders. All of these agencies offer you access to both your credit report and score. This process is free and incredibly simple!

We at Gow & Partners encourage you to check these at least once a year, since even minor errors can cause problems for credit applications down the line. If you have any questions relating to Credit reports/scores, or credit applications more generally, then do not hesitate to contact our dedicated team of accountants on 01254 589799.

Improving your Credit Score

There are many straight forward things you can do to improve your credit score. The most effective and assured methods are as follows:

1. Be on the Electoral Role- and check that your personal details are correct, since even minor errors can utterly jeopardize your credit report! Making sure that you are on the electoral role is the best way to avoid problems with identification, and will boost your score by 80-100 points.
2. Spread out your Applications- recognise the importance of prioritising your credit applications, and not making too many at once. For instance, If you are going to apply for a mortgage, it is a bad idea to get a new credit card and phone contract in the weeks leading up to the mortgage application.
3. Evidence of Stability- avoid constantly switching from lender to lender, e.g. bank accounts. This makes your finance look unstable to prospective lenders when making more important credit applications.
4. Pay back in good time- make sure you are making required payments back in full and on time. If you don’t trust yourself to do this then it may be a good idea to set up a direct debit to pay back the minimum amount, and then making any extra payments on top of this yourself.
5. Revolving Credit- this revolves around having credit that is not in use, such as credit cards and overdrafts. This directly increases your score! If you have revolving credit then it is clear to lenders that you have credit available to you, meaning you are unlikely to miss a payment. If having constant revolving credit is unrealistic for you, then a good middle ground may be to temporarily reduce the credit you use in the months leading up to an important application.
6. Understanding the ‘lag’- changes in your finance (e.g. clearing an overdraft) will generally take 4-6 weeks to register on your credit report. You may want to wait a while before making an important application in light of this.