Improving your credit score: how should you do this?

Representative Example

Total amount of credit £80, duration of the agreement 29 days, rate of interest 292% per annum (fixed), total amount payable (in one repayment) £98.56. Representative 1281.8% APR.

Knowing the ins and outs of credit reports and credit scores can prove useful, especially when it comes to improving your own credit scores. Now that we have had an in depth look into the world of credit reports, it is time to assess the many different ways we could utilise this information to our advantage.

Improving your credit score not only proves beneficial when applying for credit e.g. credit cards or online loans but is also a useful measure of your personal financial health. Read on to discover the many ways you could go about improving your score.

Woman jumping in air

Repaying on time

The most sensible approach to bettering your credit score is to make sure repayments are made on time and you do not default on any of your accounts. Someone who is unable to meet repayment obligations could be deemed a potentially high-risk customer thus resulting in a lower credit score. Keeping up-to-date on payments and demonstrating responsible borrowing should result in an uptick to your credit score.

Set up direct debits to avoid any late or missed repayments. This will certainly help you manage your finances and prevent you from forgetting to make payments. If direct debits are not something you wish to pursue, adding entries to your calendar or phone can help remind you to make payments on time. Having a budget in place can help ensure that monthly instalments are met comfortably and to prevent any unexpected costs from derailing your repayment plans.

Fewer open accounts

The number of credit accounts that you have open plays a significant part in determining your credit rating. Having multiple open accounts can be demonstrative of someone that has a high reliance on credit, resulting in a lower credit score. However, this is not always the case. Having multiple accounts whilst keeping up with repayments can be indicative of a responsible borrower.

Having multiple unused open credit accounts can also result in a lower credit rating. If there is no need for the available credit it could appear more responsible for the individual to minimise the number of open accounts that appear on their credit reports. This will reduce the negative information available to Credit Reference Agencies (CRAs).

Only borrow what you can afford so it does not hinder your chances of repaying the borrowed sums on time. This will eventually help your credit score to be more stable and in turn keep it at a favourable level.

Frequency of credit applications

The frequency with which an individual applies for additional credit can have a detrimental affect on their credit score. Someone that applies for credit from multiple sources within a short-time period could be seen as being in financial difficulty and thus a potential high-risk borrower. A drop in your credit score will therefore be seen to mirror this. If you are looking to better your score make fewer applications across a longer period of time.

You may be wondering how you would be able to submit fewer applications whilst remaining successful at obtaining credit. There are various comparison sites available which will link you to credit providers that are more likely to provide you with credit based on your credit history.

Optimal credit utilisation

As we previously discovered, your credit utilisation ratio represents the amount of credit you are using at a given point in time in relation to the total amount of credit you have at your disposal. A ratio that is at either end of the spectrum i.e. too high or too low will result in a lower credit score.

In order to increase your credit score you want to maintain anywhere between 10% to 50% utilisation. Anything higher than that could indicate that you rely heavily on credit to finance your current lifestyle. Anything lower than that could be demonstrative of an individual with a limited credit history causing uncertainty in the eyes of potential creditors.

Here are additional suggestions of different ways to improve your credit score.

If you are looking to increase your credit score for a specific reason e.g. to obtain a mortgage, find out which CRA's the credit provider will be using to make their decision as to whether you are a worthy potential borrower. By doing this, you will be able to take strategic steps to increase your credit rating for those specific CRA's.

If you have not already done so make sure you get yourself on the electoral roll. By being registered on the electoral roll, your personal information e.g. full name, date of birth and home addresses will be stored on a database that is easily accessible by CRA's. This may increase your credit rating because it provides lenders with the ability to check the validity of your identity as well as the accuracy of the information you provided.

Make sure all information recorded on your credit reports are accurate. This will prevent there from being any unnecessary negative information recorded which could be causing detriment to your credit score. Anything that is no longer required to appear on your credit report, e.g. loans greater than 6 years, should also be removed to reduce the detriment they may be causing to your credit score.

Bettering your credit score can prove to be a challenging and time-consuming task, especially if you start off with a lower than average score. However, taking steps to improve your score will only prove beneficial in the long run. Most lenders and credit facilitators prefer it when you take steps to show improvement as this makes you appear more responsible.