What is a credit score and how can you improve it?

You might have heard about credit scores and know you might need a good one in the future.

 

But what do you really know about these numbers and how could they impact your life?

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Your credit score is extremely important when you make a big decision, such as buying a house, starting a business, or purchasing a vehicle. Mortgage brokers and lenders will only consider you if your credit score is at a certain level. Improving your score now will be a big help in the future. 

While browsing the internet, you may find a lot of different suggestions on how to build your credit score and what services are available to you to help you enhance your credit. We have collected a few of the most tried and true methods to improve your credit score.

1. Credit cards and credit utilisation

Credit cards provide you with the ability to borrow money and pay it off in monthly instalments. The amount that you can borrow varies but, in most cases, your first credit card will have a limit of between £800-£1500. These monthly payments contribute to building your credit score, as they demonstrate how reliably you are able to repay money. 

Credit utilisation can be simply put as “how much you use your credit card.” You should be aiming to keep your use at 30% of your card limit. For example, if your credit limit is £1000, don’t put purchases of more than £300 on there at one time. This number will be different for everyone, as credit card companies will change your limit based on how frequently you use your card. But by only using 30% of the amount or less, banks recognise that you are trustworthy and eventually increase your allowance, which in turn raises your credit score.

2. Pay back your borrowed amount

The most effective way to raise and sustain your credit score is to pay off your borrowed amount at the end of each month. This prevents you from forgetting how much you owe and getting charged additional fees. Also, by paying off your credit cards every month, you are creating a history of on-time payments. Credit companies can track and report this history, which will subsequently help your credit score.

3. Limit your credit cards

It can be tempting to take out multiple credit cards that have different rewards and benefits under your name. Keep in mind that the more cards you have open, the more difficult it becomes to track them. It also gives credit companies and banks the impression that you’re in need of credit. By keeping track and choosing the right cards for your situation you can maximize your rewards while keeping your finances in check. Some credit cards charge expensive annual fees.

4. Be careful with joint accounts

If you are financially linked to somebody else on any product, that will mean that their files can be accessed and looked at as part of assessing whether your credit gets approved. Even a joint bills account with flatmates can mean you are co-scored.

Therefore if your partner or flatmate has a poor history, keep your finances rigidly separate, and it should maintain access to good credit for you.

There are currently only four products that can infer financial linking – a joint mortgage, a joint loan, a joint bank account (not savings as they don’t go on credit files), and in certain circumstances, your utility bills. Being jointly named on a bill with a flatmate shouldn’t mean you are financially linked – this should only happen when the energy firm is confident you’re a couple (eg, when your bills are addressed “Mr and Mrs”).

It’s worth noting that while many people think they have a “joint” credit card, these technically don’t exist. It’s one person’s account, the other just has a second card to access it.

5. Cancel unused credit cards

These can kill your applications. Access to too much available credit, even if it isn’t used, can be seen as a problem by banks. If you have a range of unused credit cards and lots of available credit, it could be a good idea to cancel some of them. This lowers your overall available credit and should help raise your score.

However, long-standing accounts with good credit histories can be a benefit to your score, so they’re often best left open. There’s no definitive answer as to whether you should close down your old cards, because all lenders are different. Try to strike a happy medium – if you have lots of unused credit, close some of the accounts, but don’t close them all. Starting with the most recent would be best, so that you maintain your longer standing history with the others. Above all, don’t max them out.

If you need to cut credit card debt costs, first check if the old cards will let you shift debt from other cards, as you then won’t need to apply for new credit. This helps your credit file, and means you’re using your existing credit more efficiently.

 

Hopefully, these tips help you on your journey to building a stable and high credit score and allow you to become approved for any loan you may have in the future.

"Thinking about your credit score now means you won't get any bad surprises when you need to be approved for a mortgage."
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