If you ever want to borrow money, whether it's in the form of a mortgage or a credit card, the health of your credit rating will be a key factor in how much you can borrow, what rate you can borrow at and whether you can borrow at all.
“Your credit score is incredibly important to your financial health. It has a huge impact on whether you can get a loan, credit card or mortgage and the interest you pay on any borrowings,” says Matt Sanders from Gocompare.com.
“Essentially lenders want customers who will repay their borrowing. The higher your credit score is the more credit-worthy you are and the more likely it is that you will be able to access the best deals on the market. If on the other hand your score is low, lenders may decide not to offer you credit or lend you money at a higher rate of interest.”
Your credit score is undoubtedly important, but when did you last check yours? Giving yours the once over could make a huge difference to your chances of borrowing at a rock-bottom interest rate as even a couple of discrepencies could stop a lender approving your application.
Here are 10 ways to boost your credit rating.
1. Get hold of your credit report
The first thing you need to do is to get hold of your credit report. You can access it via any of the three main credit agencies in the UK: Experian, Call Credit and Equifax. By law, all the credit agencies are required to provide you with a one-off copy for just £2 so don't be conned into paying more.
Check your report on a regular basis – say at least once every 18 months – and always in plenty of time before you apply for credit.
2. Look for mistakes
Once you have your report, go through it with a fine-toothed comb to make sure there are no mistakes. "Worryingly, there are over 500 recorded cases a year in which lenders have incorrectly recorded information on people's credit files," says Steve Rees, managing director of debt management company Vincent Bond & Co.
Even a minor mistake could hinder your chances of getting credit so make sure all your details are correct and that all your borrowings are on record. If there is a discrepancy, contact the three main credit agencies to get it corrected as well as the business that the loan was with.
3. Check for old addresses
Make sure that any of your old addresses are on your credit report and are spelt correctly so that old loans and credit cards are included in your credit report.
It may seem counterintuitive to want evidence of previous debts on your record, but lenders like to see past history of how you've handled previous loans - so the more examples of you successfully repaying a debt the more chance you stand of securing credit.
4. Check for hidden debts
Making sure all your addresses are correct can also prevent you from building up 'hidden debts' – debts you aren't aware exist."
These hidden debts can swiftly stack up, leaving many consumers owing more than they realise and damaging their credit score," says Mr Rees. These include things such as forgotten direct debits on unused accounts that push you into an overdraft or old mobile phone contracts.
Provided all your contact details, both old and new, are correct your credit report should reveal these debts for you so you can take steps to sort them out.
5. Show your stability
Lenders like to lend to solid and reliable members of the community – the kind of people who aren't going to cut and run, never to be seen again once they've got hold of the bank's money.
The best way to show your stability is by registering to vote. This provides potential lenders with proof of your name against a fixed address, which helps them fight fraud. If you cannot vote in the UK you can still send the credit reference firms proof of your residency and ask them to attach a note to your file explaining this.
6. Consider cancelling unused credit cards, debts and accounts
When assessing how much money they are prepared to lend to you, banks and loan companies look at how much credit you already have available. This will include credit card limits, overdrafts and loans.
So if you have any unused credit cards you may want to cancel them in order to reduce how much available credit you have elsewhere. Also, if you have a high credit card or overdraft limit that you never use, get the limit reduced.
However, check the interest rates on those unused credit cards – could you use that to fulfil your borrowing needs?
Also, don’t reduce your available credit down to the bare bones. Lenders don’t like it if you are using all the credit available to you – it suggests you are on the brink of debt problems. Keep a buffer available.
7. Get a credit card
Creating a debt may seem an odd way of improving your credit rating but, again, it helps show lenders that you are a reliable borrower. So, if you have very little – or bad – credit history, getting a credit card and managing it sensibly will improve your credit rating. This means spending only what you can afford on the card and paying off the balance in full and on time every month.
8. Be careful who you link your finances to
"Marrying someone will not link up your credit reports but applying for joint credit will," says James Jones, head of consumer affairs at Experian. When you apply for a joint credit card, loan or open a joint bank account you and the person you apply with become connected via your credit reports. This means you are marked down as having a 'financial association', meaning the way one of you manages your finances may affect the other.
For example, if one of you does have a bad credit rating it could affect both of you, so be very careful who you open joint credit with.
If you wish to end a financial association with someone you'll need to close any joint accounts, cards or loans (you have to do this together) then contact the credit reference agencies (you can do this on your own) to get them to remove the financial association from your file.
9. Don't make lots of applications for credit
Every time you apply for credit the lender will check your credit report. While this isn't clearly marked on your report for you to see, a 'footprint' – a sign that a credit check has taken place – is left behind which other prospective lenders can see. So if you apply for lots of credit cards or loans at the same time you run the risk of appearing "desperate" or "the victim of fraud", says Mr Jones, which won't make lenders keen to lend to you.
Obviously, the problem here is you might apply for the credit card deal that is at the top of the best buy tables, only to be rejected because that offer is reserved for people with the squeakiest of clean credit history.
The way to get around this is to use a comparison website that offers a ‘soft search’ facility. This means they will take a few of your details and check which lenders are likely to accept your application before you actually make an application. This means when you apply for that credit card or loan you can be confident you are going to be accepted and won’t end up in a vicious cycle of rejection caused by other rejections.
10. Never miss a payment
This is the golden rule of credit ratings, if you ignore everything else in this article take heed of this. Never miss payments, as it will damage your rating. If you know you are going to struggle to meet a payment contact the company as soon as possible and try to come to an arrangement rather than simply defaulting.
The best way to avoid this problem is to set up a direct debit for at least the minimum payment each month. That way you’ll never miss a payment or be late paying.