Despite careful planning of your finances, it is always possible that an unexpected expense could leave you struggling until payday. For those who do not have access to savings or traditional forms of credit, such as overdrafts and credit cards, this can lead to a financial emergency. This is especially true for those with a […]
How to Avoid Having a Bad Credit Score
Understanding your credit score might seem complicated. A quick search on Google will bring up plenty of pages detailing what credit scores mean, and suggestions on how to boost yours – but does it all actually make a difference? With conflicting pieces of advice out there, it can be hard to know how to put yourself in the best possible financial position, to keep your credit score as high as it can be. That’s why we’ve pulled together these top tips, which all offer really simple ways to help you avoid having a bad credit score.
Try and Pay Your Bills on Time As Regularly As You Possibly Can
Probably the single most effective way to make sure that you avoid having a bad credit score is by paying all of your debts off on time. Late payment of bills – for examples on loans, credit cards, or utility bills, can trigger reporting to the credit bureaus, which can ultimately cause your credit score to be lowered.
Therefore to avoid this, it’s helpful to make sure that you make the payments on, or even before, their due date. One of the best ways that you can do this is to set up direct debits, so your payments are automatically taken out of your bank account, without you ever having to worry about remembering when they are due.
If that’s not possible, it’s still worth making sure that you note down the due dates for all of your bills, either on an actual calendar – or on one of the many smartphone apps that are now available to help you track your monthly outgoings. It’s not just about your electricity and gas either, don’t forget about mobile phone bills, or other bills that might only come out once a year like insurance, or your vehicle MOT.
If you’re able to, it’s a great idea to schedule all of your monthly payments so that they come out of your bank account at the same time – ideally very shortly after you get paid. It might feel like a shame to see money go out of your account so quickly, however it does means that your debts are paid promptly. This protects your credit rating, and gives you one less thing to worry about, whilst you spend the rest of your hard earned cash on other things.
Register to Vote
This is a really quick and simple step that you can take to help put your credit score in a better position. The process can be done in under five minutes, on the gov.uk website <https://www.gov.uk/register-to-vote>. Registering to vote doesn’t mean you actually have to cast a vote when there is an election (although of course, it is an added bonus that registering to vote will entitle you to do this.) It’s also worth noting that credit agencies don’t care what your political allegiance is – however they do like the fact that you will then appear on the electoral register, as it helps to validate your address.
If you are concerned about privacy, you can opt out of the open, public register. This means that you won’t be subjected to marketing leaflets or post, by companies that use this as a mailing list. However credit agencies will still be able to validate your details – which helps give them confidence that you are providing accurate details, and can therefore help to improve your credit score.
Check That Your Credit Report Is Actually Accurate
There are three major credit bureaus, Experian, Equifax and TransUnion. Each of them will have a file on you, and there may be slightly different information held about you in each. You are within your rights to request a free credit report once every year. It is a really good idea to go over all of the transactions that are visible on the report. Mistakes can happen, and they can negatively impact on your credit score – through no fault of your own.
There are some common reasons that mistakes might happen, which it’s worth keeping an eye open for.
– If you have divorced, your ex’s details may still be listed on the report. If they have poor credit, this can negatively impact on you. Even if they have a better credit score than you, it is unlikely to actually impact on your score in a positive way, so it’s still a good idea to have their details removed, regardless, in case their rating drops in the future.
– A debt that you have repaid may still be listed against your name. Occasionally the same debt can appear twice.
– On rare occasions, your details may get confused with someone else with the same, or a very similar, name.
If you do spot any mistakes, it’s important to correct them as quickly as possible. All three credit reporting agencies can be contacted in writing, and you will be asked to provide supporting evidence regarding your dispute. They are then obliged by law to open an investigation, or they may choose to immediately delete the mistake, based on the strength of your evidence. Having mistakes removed can drastically improve your credit score, particularly if your report listed a bad debt that you had since repaid.
Manage Your Debt Effectively
If you have outstanding debts, it’s sensible to try and address these as quickly as possible, and to prioritise the way that you pay them off. This can feel like a daunting process, but there are a few steps that you can take to make the whole thing slightly more straightforward.
Firstly, make sure you understand exactly where you have late payments, or delinquent debts. These will all be impacting on your credit score. If you have a lot of outstanding debt, your free annual credit report (as detailed above) can be a good starting point, as it should list out your debts.
Secondly, work out which of your overdue debts has the highest interest rate. These are the debts that are going to cause the most problems in the long run – and are likely to have the highest overall impact on your credit score. You should, where possible, prioritise paying these off first.
Thirdly, remember that it is always possible to negotiate with lenders – particularly if you have a steady income and have a loan with a reputable provider. Banks and mortgage providers may be willing to arrange a payment plan over time, with structured repayments that can stop your debt spiralling out of control.
It is also possible to ask creditors not to pass on certain information to reporting bureaus. They are under no specific obligation to do so. If you have been good at making payments recently, they may be willing to remove or modify certain statements that they have previously made, if you have historically missed payments. Similarly, if you have a good track record and miss one payment due to a mistake, they may be willing to accept that you are still reliable, and not put a note on your credit report. Talk to them calmly and politely, and you might find that they are willing to help.
Use Credit Cards Responsibly
One of the most common causes of debt in the UK is the misuse of credit cards. When you look for advice on how to build a good credit score, one of the most things you will hear is that you should take out a credit card. It’s certainly true that, used responsibly, credit cards can be a helpful way to build up a credit rating. For many people – especially younger people, and those who are not yet homeowners, a credit card can be one of the few ways that you can actually prove that you reliably make payments against a debt that you owe. If you pay your credit card off on time and in full every month, you build up a good track record that can boost your credit score.
Nevertheless, it’s very easy for credit card borrowing to quickly get out of hand. There are lots of ways this can happen. Many companies will lure borrowers in with attractively low interest rates, or perhaps even 0% interest rates for the first few months. However, this can quickly rise to 15% or 20% once the introductory offer finishes. If you don’t pay the debts off in full, they can build up very quickly, to the extent that they can become unmanageable. This is particularly the case if you have multiple credit cards.
If You Do Use a Credit Card, Choose It Wisely
There are lots of different credit cards on the market. As we’ve already mentioned, some will have great introductory rates to tempt borrowers in. However, when you’re picking your credit card, it’s important to bear a few things in mind.
Making lots of credit card applications in a short space of time can lower your credit rating. All credit card applications are listed on your credit report, and having multiple applications close together can be a red flag to potential lenders, as they may assume that you are attempting to put a large amount of credit across several cards, that you would not then be able to repay. Some credit card companies will get round this by offering a ‘light touch’ assessment, which means that prior to making a full application, you submit some limited personal details to them, which allow them to make a judgement as to your suitability as a borrower. This is not recorded on your credit report, so in theory, it doesn’t have an impact if you make several of these kinds of enquiries – just make sure that you are clear whether it will, or won’t, appear on your credit record each time you make an application.
A second thing that is worth thinking about, is the benefits you can expect from the card in the period beyond the introductory offer. There are several large retailers who also offer credit cards. There are usually some added incentives for spending money with their company. If you tend to do most of your grocery shopping at the same supermarket, or perhaps always buy your petrol from the same place – it may be worth considering whether the long term benefits they offer; such as money off, or loyalty points, may add up over time. There are some credit card companies who also offer cashback – which can be an extremely helpful bonus if you are regularly putting reasonably large purchases through on your card.
Understand Your Budget and Your Spending Habits
Ultimately, there is one final piece of advice that is probably the most helpful to think about, if you want to avoid a bad credit score. If you want to get to grips with your credit score, it is important that you can be honest with yourself about how much you are spending – and where exactly it is going. There are lots of ways you can do this – whether it’s a helpful smartphone app, or by manually reviewing your spending history on credit and debit cards.
There are plenty of free budgeting apps available which can provide a useful and easy way to categorise all of your spending and help you to set spending limits on certain categories. This might be as simple as not limiting your grocery budget, or the amount you spend on petrol – but triggering an alert to remind you of your budgeting when you go over your allowance on clothes or eating out.
If you don’t want to track your spending on an app, you can still find ways to control how much you spend on certain things. Try looking at the envelope method – a really simple but helpful budgeting technique, that simply involves putting the amount of cash you have available to spend (after rent and bills) into different envelopes, with each one serving a different purpose (groceries, clothes, going out etc.) Once the money in the envelope has gone it’s a reminder not to spend any more that month.
By limiting your spending, and living within your means, you will be able to repay debts, rather than taking out additional credit. As you pay off any existing debt, and even perhaps start to build some savings, you’re also likely to see an improvement in your credit score, as it should reduce your reliance on loans and credit card debt.