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How To Rebuild Your Credit Score
Anybody who has ever tried to access finance knows how vital their credit score is to their ability to borrow money. It’s your passport to money, but while most of the information is there to confirm that you are who you say you are, there are also parts of the score that will determine whether or not certain financial products are suitable for you, or whether a company will even lend to you at all. So if your credit score isn’t doing you any favours with the banks, how can you build it back up to a healthy position again? Let’s take a look.
What is your credit score?
Your credit score is simply a list of information about you that banks and other lenders use to judge your suitability for financial products, from loans to mortgages and hire purchase agreements. While much of this information is as simple as your date of birth, past addresses and whether you’re on the electoral register, it also contains your financial footprint: how much you currently owe in total; any bad marks against your financial record or any missed payments in the past. Remember also that there’s no universal score, and different lenders will put greater emphasis on different areas of your score. For example, some creditors will mark you down if you regularly use a lot of your available credit, whereas others will consider missed payments to be the most important aspect of your score.
How do I check my credit score?
Rebuilding a low score can take time, but it’s important to remember than any score can be fixed and that there are often simple things you can do to give it a boost. The first thing that you need to do is to check your credit score with each of the three main credit agencies: Experian, Equifax and Call Credit, to see what it is. You may never have done this before or you may have only checked with one or two of them, but it’s important to have the full picture so you can see what needs to be done. You also don’t know which of the three agencies potential lenders will use to get the heads up on your finances, so you need to be in a strong position with all of them to be truly in the clear.
Experian and Equifax are both paid services that charge you a monthly fee to view your score whenever you like, though they also offer help and advice to improve your score and suggest potential finance options to you as well. Call Credit has a free service called Credit Karma (formerly known as Noddle) that lets you see your score with them after simply signing up with an account. It’s also good to know that you have a legal right to obtain a statutory credit report at any time for a small administration fee, and you can apply for one from any of the three agencies without signing up to their monthly plans. However, this is a snapshot of your score at the time, and as your score is updated monthly it might be more cost-effective to sign up if you plan to check in regularly with each agency.
What does my credit score mean?
Hopefully, once you have managed to obtain one, two or all of your credit reports from the major agencies, you will have your report in front of you and you will be able to get an idea of where you stand. Your report is divided into discreet sections in each case, and though the order or layout may be different, it will always include: financial associations; defaults and missed payments; your current and previous addresses; your credit agreements and your total credit utilisation. Let’s look at each of these and see what they mean, as well as how you can improve them.
This section of the report looks at other people whose finances are linked to yours, such as through joint bank accounts or credit agreements such as hire purchases or mortgages. This could be anyone, but typically is a life partner such as a husband or wife or a business partner, though just being married to someone doesn’t automatically create a financial association with them. There is not necessarily anything wrong with having financial associations, and in fact, being linked to someone with a good credit score can be positive, but the other people listed in this section may be taken into account when companies check your credit history. This means that if they have a bad credit score, you could be refused finance even if yours is good.
On the positive side, the financial association is time-limited and comes off your credit score after six years once you end your financial agreements with that person. If you are no longer associated with that person financially because you are separated or have been divorced, you can even apply to have their information removed from your credit score so that your past association doesn’t hold you back. To do this, you typically only have to prove that you have been living apart for more than six months and that you have closed all joint accounts and settled all joint financial agreements with each other.
Defaults and missed payments
While they are similar, defaults and missed payments are slightly different in terms of what they mean and their severity. A missed payment is exactly what it sounds like: When a payment is due to be taken out of your account to repay a financial agreement, but the payment cannot be taken within the creditor’s specified period due to a lack of funds. Note that this applies specifically to financial agreements like loans or hire purchase agreements, not payments for things like utility bills or online shopping.
Even one missed payment appears on your credit history, and a series of missed payments can be very damaging to your credit score. Consistently missing payments to a single creditor can cause them to find you in breach of the original credit agreement, which will allow them to cancel the agreement and require full payment of the outstanding balance, called a default. This can be a serious problem for your credit score and will remain on your report for up to six years, but many lenders will work with you to come up with an alternative payment plan which will allow you to pay what you owe more sustainably. It’s always best to avoid missing payments whenever possible, and there are easy ways to do this: Firstly, setting up direct debit payments to go out automatically will ensure nothing is left to chance. You can also try paying off more than the minimum each time, which will lessen the length of the loan and the interest payments while also forming a handy buffer in case you forget to pay.
Other types of default
Your credit score will also record whether or not you have CCJs, IVAs, DROs or are bankrupt. These are all methods of resolving defaults, so lets quickly run through what they mean. A CCJ or County Court Judgement is a legal method of forcing someone to pay money they owe. It stays on a credit report for six years unless paid within a month, and can seriously harm your ability to get finance. Individual Voluntary Arrangements or IVAs are legal methods of agreeing to new repayment terms with creditors which can lead to some of the debt being written off, but once again these are serious instruments which can seriously impact a person’s credit score. Debt Relief Orders (DROs) are an alternative to bankruptcy for people with debts of less than £20,000 that can also result in debt being cancelled, but requesting one can seriously affect your ability to borrow money. Finally, bankruptcy enables you to wipe out all your debts but has serious legal consequences that can limit your job prospects and prevent you from starting businesses or owning property.
Most people won’t have to worry about this section on their credit report, but it’s useful to know what it means and what you can do if any of these instruments ever do become a problem for your credit score. For example, CCJs can be contested in court if you believe that they have been falsely applied, though they can’t be removed from your credit score if they are upheld. Unfortunately, the other instruments are harder to mitigate and can adversely affect your score for as long as six years, so it’s always best to check with the Citizens Advice Bureau or the Money Advice Centre before you resort to them to see if there is another way. You may even struggle to get poor credit loans designed to help people with bad credit, and it could make rebuilding your credit record that much harder.
Next up is a section that contains all of your personal details, such as your name and past addresses. This bit might seem rather self-explanatory, but it’s actually very common for mismatched information here to result in accidental damage to your credit score that can easily be avoided. Major life events such as marriages, divorces, house moves and name changes are a good time to check this information because it’s here that it sometimes goes wrong.
The credit report tracks your addresses for the last eight years, and if their records don’t match lenders’ records, it can make you seem less trustworthy, so you should try to ensure you update your details with them if something doesn’t look right. Making sure you’re on the electoral register wherever you live is also a good idea, even if you don’t vote, because it’s an additional layer of evidence, and you can be penalised if you aren’t registered. The same applies to all of your details that are subject to change, including your legal name, so it’s a good idea to check your credit report if anything changes to make sure they have taken it into account.
The last major field you’ll see in your credit report covers all of your existing credit agreements in one list, and it includes everything from a £500 hire purchase scheme on a new games console all the way to your mortgage and all of your overdrafts. Everything that has been registered with the credit agencies goes on there and can be seen by potential lenders to ensure that you’re not overextending yourself by applying for more finance. This area often also incorporates a credit utilisation section that shows how much credit you have access to and are using at the time, such as credit limits on your cards, overdrafts and store cards. This tells lenders how much your debt could potentially increase in the future without you having to make any more applications for credit, and so how affordable their potential loan could end up being further down the line.
In terms of using this data to your advantage to build up your score, as a general rule, lenders prefer to see fewer lines of credit and low credit utilisation. On the other hand, it’s not a good idea to have no credit on your file, because taking on credit and paying it off is a good way to demonstrate that you’re able to manage your money wisely. But if you’re nearing the limit on many or all of your sources of credit and being penalised for it, this can seem like a mountain to climb. Paying off your debt in a slow and manageable fashion is one way to help rebuild your credit score, and though it might take a while it’s worth getting below that 50% threshold for the good that it will do your credit score. Similarly, it’s worth closing overdrafts or cards that you don’t really need anymore because it will reduce your overall debt potential and make creditors more confident in lending more to you.
All in all, rebuilding your credit score is a slow and steady game that requires quite a commitment to repaying debts. However, there are a few easy steps you can take to give yourself the easiest start, and ensure it’s not so much of an uphill struggle.