Regardless of whether you have a poor credit score or lack a credit history, it is never too late to start building your credit score and improving your chances of loan approval in the future.
What is a credit score?
A credit score is a value which expresses an individual’s creditworthiness baked on a number of factors including credit utilisation, length of credit history, number of accounts, types of accounts, existing debt and payment history.
Your credit score will be used by loan providers and credit card companies when determining your creditworthiness and whether or not to approve an application, as well as the specific lending conditions. With just that one value, lenders wil be able to see whether or not you are a reliable borrower and how likely you are to be able to afford a loan and repay it reliably and punctually.
Generally speaking, a score of below 580 is considered to be poor credit. 580-669 is fair, 670 to 739 is good, 740 to 800 is considered very good and more than 800 is excellent, although it will depend on the rating scale used.
5 ways to improve your credit score
Luckily, even if you currently have a bad credit score, there are ways to improve this and increase your creditworthiness.
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Join the electoral register
This is one of the quickest and simplest ways you can improve your credit score. If you are not already part of the electoral register, make sure to join as soon as possible. Lenders will use the electoral register in order to verify basic information on your loan application such as name and address. If you are not on the electoral register, it can hugely slow down the process and could also hinder your chances of being approved for a loan.
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Keep track of your credit utliisation ratio
Your credit utilisation rate refers to how much credit you are spending versus how much credit you have available. Lenders will look at this value to see how dependent you are on your credit and how responsibly you are able to manage your finances every month.
Financial experts recommend never exceeding a credit utilisation ratio of 30% i.e. spend a maximum of 30% of the amount of credit that you have available to you. Keeping track of this value will help you manage your finances better and appear more responsible to lenders.
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Check for errors
You are entitled, and encouraged, to check your credit report a certain number of times per year. Doing this will allow you to look for any potential mistakes including listing closed accounts as open, listing punctual payments as late payments or even mistakenly confusing your credit information with someone else’s. Identifying these errors allows you to address them as soon as possible by following up with the credit bureaus. Although it can sometimes be a bit time consuming, once fixed it can positively impact your credit score.
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Avoid applying for multiple loans at the same time
It can be tempting to apply for multiple lines of credit from different providers and maximise your chances of being approved for personal and loans for bad credit histories, especially if you are in need of urgent funds. However, this will hurt your credit score as it will make you appear desperate to lenders and indicate that you might be a high-risk borrower. All of this will make it less likely that you will be approved for a loan.
Every time you apply for a loan or line of credit, it will appear on your credit report and can negatively impact your score. Therefore, the more applications you make, the more you are negatively affecting your credit score. Even though it can be frustrating, it is better to wait between rejected applications and work on improving your credit score before reapplying.
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It is never too late to get started
The biggest mistake you can make is to put off building your credit score. The longer your credit history, the more positive it will be for your long-term financial prospects. Those with poor credit can especially benefit from starting to build their credit history as soon as possible and will likely see a big impact over time. However, even if you already have a high credit score, working to build your credit score will only benefit you in the long run and help you secure more favourable loan conditions in the future.
If you do not currently have a credit history, the sooner you start the better and there is a £2 credit report available from the Government to help you begin.
Get into good habits from the start including making payments on time and, as much as possible, paying off your monthly statements in full. All of this will show you as a reliable borrower and help to build good credit fast. If you have a poor credit history or a negative mark on your credit report, building positive credit will help to fix your credit report over time.
Financial experts suggest that the majority of negative credit situations can be improved within 6-12 months so the sooner you start, the sooner you can fix your credit.