ONE of the most important factors when applying for financing, such as a loan, credit card or mortgage, is your credit score.
Here’s how to check and improve your credit rating to increase your chances of being approved for the best deals.
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Everyone has a credit score which is used by lenders or credit card providers when asking to borrow money.
It is a combination of all your debts and a record of your ability to repay on time.
There are three main Credit Reference Agencies (CRA) in the UK which collate your financial data to provide a report and rating which lenders can access when you apply for products such as loans or mortgages.
The main CRAs are Experian, Equifax and TransUnion.
Lenders will refer to your credit report and score to see how reliable you will be as a borrower.
The higher your score, the better your chances of getting approved for large amounts of credit, like a loan or mortgage at decent rates.
Any arrears, late payments, or bankruptcy will lower your score, making it harder to get the best deals, while tracking repayments will increase it.
There are other factors that influence your score beyond just paying your bills on time.
Here’s what you need to know.
What is a good credit rating?
Your score will be calculated based on the financial products you own and your payment history as well as other factors.
Each ARC will calculate your score differently.
Experian rates users on a scale of zero to 999 and a good score ranges from 881 to 960.
Equifax scores range from zero to 1000 and a good score ranges from 531 to 670.
TransUnion credit scores range up to 710 and a good score is between 604 and 627.
What is a bad credit score?
Your score can drop for a variety of reasons, such as if you miss payments, become bankrupt, receive county court judgments, or simply aren’t on the voters list.
This often puts you in bad credit, making it harder to access the best financing deals.
A bad credit score can go up to 720 on Experian, 530 on Equifax and 565 with TransUnion.
How to improve your credit rating?
Pay your bills on time: Any late payment will be recorded on your credit file. This will lower your score and hurt your creditworthiness.
Paying your monthly credit card bills or loan and mortgage payments on time shows lenders that you are a reliable borrower and ultimately increases your credit score.
Late payments can stay on your credit report for six years, which can have a long-term impact on your credit rating.
You can avoid late payments by setting up regular direct debits to pay your bills.
Register on the electoral lists: Your credit report is not only used to show how well you manage your money, it also helps prove who you are.
Registering to vote helps lenders verify your name and address, reduces the risk of fraud and makes it easier to get credit.
Correct mistakes: Errors on your report, such as missed payments displayed incorrectly or your expired address, can lower your score.
You can write to a CRA to get them to correct the errors.
Watch your grade: You’re unlikely to know which ARCs a credit grantor or lender will use, so it’s best to keep an eye out for reports from all three.
Sign up for alerts to see when your score changes and if there are any errors that need fixing.
Cancel unused cards: Lenders will check your credit report to find out the amount of your debts, such as the balance on your cards.
Too much money can cause a lender to worry about your ability to repay.
Close any old credit or store cards, as this reduces the amount of debt you are managing, while settling debt can also increase your score.
Soft searches: Applying multiple times for credit can hurt your credit score. Check the likelihood of you being accepted for credit before you apply by doing a “simplified search”.
Most providers and comparison websites offer eligibility checkers that let you see which cards or loans you’re most likely to be accepted for by doing a “simplified search” of your credit report.
This is not seen by any provider and will not affect your credit rating. Then just apply for the one with the best chance of success.
Beware of a partner’s credit history: It’s not just how you manage your own money that affects your credit rating.
Your score can also be impacted if you have a joint account with someone else who is in debt. This can be tricky if you had joint finances with an ex.
You may need to write to CRA to register a letter of dissociation so that your credit files are no longer linked after a breakup.
Show that you can manage your debts: You can’t show that you have a good track record in debt management unless you have one.
Not everyone will have a mortgage or need a loan, but the simple act of starting with a credit card and making the monthly payments on time can show that you are a reliable borrower and build and increase your score.
Paying your energy and mobile phone bills on time will also help.
Credit building cards: It can be difficult to rebuild your score once you have bad credit. But a bad score can also make it harder to get the best deals.
You can start rebuilding your score and show you’re a reliable borrower with a credit builder credit card.
These are for people with bad credit. The balance is often lower than standard cards and interest rates are high if you miss payments.
But these cards help boost your credit rating as long as you pay your bill on time each month.
It could also improve your chances of getting decent credit offers in the future. Find out how to get the best cards for bad credit.
How to check your credit score
All three ARCs calculate your score differently, so it’s worth checking your ratio with each.
Equifax and Experian charge £7.95 and £14.99 per month respectively to access your report and score.
Experian also offers a 30-day trial.
Both will let you see your score for free, but it’s also worth downloading your report to check for any errors that might be impacting your score.
TransUnion’s Credit Karma service gives you unlimited access to your report and score for free.
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Why did my credit rating go down
Your credit score can drop for a variety of reasons.
Missed payments can lower your score.
It can also go down if you just applied for credit or settled or closed an account.
There may be more serious reasons, such as your identity being stolen and someone applying for credit on your behalf or there may be errors in your report.
Not all discounts are a concern, especially if you have a high rating, but it’s always worth checking to see if there’s anything you need to fix.
What credit rating do you need for a mortgage loan?
There is no specific credit score you need for a mortgage
Ultimately, the higher your score, the better your chances of accessing larger loans and better deals, as lenders will be more confident in your ability to repay.
There will however be other factors such as meeting the lender’s affordability and income requirements and passing their stress tests.
Find out how to access the best mortgage offers.
Does Klarna affect your credit score?
Buy-it-now, pay-later (BNPL) programs such as Klarna allow shoppers to delay payment for items and spread the costs over a set period of time.
This is a form of credit, but BNPL’s providers say they only soft search your report so it’s not visible to other lenders.
Your credit score will only be affected if you miss a payment.
This will show up as a late payment on your credit report and, like defaulting on other debt payments, could lower your score.
You may also have to pay late fees or interest, which will hurt your rating if you fail.
Your score could be further damaged if you fall behind.
Check the terms and conditions if you are using an BNPL program so that it is clear how much and when you need to repay.
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