When applying for any form of credit, UK borrowers need to take into account the role that credit scores play when applying for a loan. While a credit score isn’t the only important factor that plays a part in whether you’ll be accepted or not, it does contribute significantly to your creditworthiness and overall credit rating, so it’s important to understand what a credit score consists of. Once you understand what a credit score is and how lenders use it, it’s possible to take steps to improve your overall creditworthiness, and in this article we’ll discuss the numerous ways borrowers can build up an attractive credit history. Of course there’s no one-size-fits-all rule that works for every borrower under the sun, so it’s important to appreciate how your personal credit score may be affected by different factors.
What is your credit score for?
Firstly, it’s important to understand that your credit score and your credit rating are two different things. A credit score is a summary of your financial history, usually covering the last 6 years, and is available from credit checkers like Experian and Equifax. Your credit rating, on the other hand, is a specific lender’s interpretation of your overall creditworthiness; while your credit score is part of your overall credit rating, a good credit score alone is not enough to guarantee that you’ll be granted a loan.
The main difference between the two is that a credit rating takes into account many different factors, which can include things like what you earn, where you work, your employment history and even your marital status. Credit scores don’t contain this information because they’re generated purely from your financial track record, which is freely available to anyone with access to the centralised database on which this information is held. While your credit score may not be the deciding factor of whether you get a loan or not, it can certainly play a part in disqualifying you for one; lenders don’t look to see whether you’re a particularly reliable borrower as much as to see if there’s evidence that you’re an unreliable one. To put it another way, a good credit score won’t get you a loan, but a bad one might well stop you getting one.
What’s in a credit score?
So what sort of information will credit checkers be looking at when deciding what score to give you? There are a range of factors which influence your overall score, but the two most important parts are the credit accounts you have, and the ways in which they’re used.
Credit Accounts:
A core component of a credit score is how much credit you have access to. A good score here can be obtained by having access to some credit, but not too much; too many lines of credit makes you a potential risk, while having no credit line whatsoever doesn’t demonstrate that you can reliably deal with a credit account. While credit-builder cards and credit accounts can be an excellent way to develop a financial track record, access to an overdraft facility also counts.
How you use credit:
This is probably the most important part of your credit score, or at least the section that can most quickly ruin a good score. If you’ve got access to credit but you’re reliably paying it back this demonstrates that you’re stable and reliable enough to handle a credit account. If, on the other hand, you’re constantly being hit with late payment notices then this will quickly put a black mark on your credit history, and your credit score will suffer as a result.
Residential history:
In addition to your credit accounts and reliability, credit checkers will also have access to your residential history. While this doesn’t directly influence your score, it will be used by lenders in their decision to approve or decline your application for a loan. Credit reports will expect you to be registered to vote at your address, which is a key element for protecting against fraud - make sure that you register on the electoral roll in order to avoid this impacting on your credit score.
How to boost your credit score
There’s no “magic bullet” which will give you a perfect credit score. Even if there was, a perfect credit score isn’t a guarantee that you’ll be approved for a mortgage: because a credit score is only generated from a small set of data, it doesn’t reflect all the variables which an actual lender will take into account when deciding whether to lend you money or not. However, if you need to improve your credit score, there are a few positive steps you can take to build up a better financial backstory.
Open up lines of credit
As previously mentioned, borrowers who have demonstrated that they can have access to credit without immediately going out and overspending are seen as more reliable and trustworthy by lenders. In fact, people who pride themselves on never needing credit and never going into debt are actually potentially damaging their credit score; a lender is going to be understandably nervous about giving you your first ever loan, especially if it’s for something as large as a mortgage.
A quick and easy way to build up credit is to take out a linked credit card from the same bank as your current account. You’ll only use your credit card in the same way that you use your everyday debit card, to run up daily expenses and purchases, but because you have the ability to spend more you’re demonstrating that you’re able to use credit, not abuse it. Of course you’ll never want to fall behind on payments, so your normal debit account will automatically clear payments for the credit account at the end of the month. In this way it’s possible to build up a decent credit history without changing your daily habits at all.
Bear in mind that you can always have too much of a good thing, and credit is no different. Lenders will see a borrower with access to too much credit as a risk; it potentially shows evidence of financial stress, and also presents the possibility that they might lean heavily on credit from time to time. While 4-5 credit accounts are good, much more than this is likely to set alarm bells ringing at the credit agency. You’ll also want to ensure that you don’t regularly hit the ceiling of your credit limit, if you’re using this facility; this shows lenders that you’re struggling to live on the credit you have, which is a bad sign (so don’t intentionally keep your credit facility as low as possible; you’ll only want to borrow between 25% - 80% of your total limit each month).
Register to vote:
As mentioned previously, the electoral roll plays an important part in countering financial fraud. Make sure that you’re signed up; it’s quick and easy, and if you aren’t registered it could have a nasty impact on your credit score.
Set up direct debits:
It’s all too easy to miss a payment on a bill because it got lost in the mail, or it got slipped in a drawer. Instead of waiting for a late payment notice, it’s best simply to arrange direct debits for all of your monthly utility bills - with online banking becoming the norm, it’s easier than ever to sort out hassle-free payments for every bill you receive.
What can damage your credit history?
Unfortunately for us consumers, credit scores are something of a no-win game; you don’t stand to gain much from a perfect score, but you can lose an awful lot by having a poor score. It’s also a lot easier to ruin a score than it is to improve it; here are a few of the most destructive problems which borrowers can run into with their credit score.
Late payments:
Unsurprisingly, evidence that you’ve repeatedly failed to pay back a loan does not give lenders much confidence in you as a borrower. Missing payments shows that you can’t necessarily be trusted, and with banks acting very cautiously in recent years even a few late payments can be enough to knock your credit score into the gutter. Bear in mind that not all businesses share their billing records with UK credit companies; EDF Energy, for instance, does not provide data on its customers to Experian, one of the major UK credit checking services. This means that even if you were to fall behind on one of your utility bills, your credit score may still not suffer as a result.
It’s also important to bear in mind that credit checking services look for trends to support evidence of your general behaviour. For instance, if you’ve kept up on credit repayments across the board for the last 12 months but missed a single utility payment, this will be treated as an outlier; there’s enough evidence to show that this was just an accident, and not really proof that you’re a risky borrower. However if there are several missed payments this shows that you’re a potential risk, since you have a habit of missing payments.
Not every credit supplier will give your information to credit services; keeping up on phone payments, rent payments and council tax rarely helps to improve your credit rating, and if you miss a payment it’s unlikely that this will affect your credit rating. However, if a supplier has to send a debt collection agency after you this will most certainly become part of your credit history - if you can’t pay off a bill in full, contact your supplier to arrange a solution. They’ll almost always be happy to accept a payment plan instead, rather than sending the debt collectors round.
While your credit history stretches back over 6-7 years, the most recent blots on your record will be the ones which have the most impact on your score. Anything in the last 12 months will be seen as a bad sign, because lenders are more concerned with your present circumstances than what they were several years ago. This is good news if you’re repairing your credit history, because after a year or two you should be in a much better situation. However if you’re planning to buy a house in the near future, you must make sure your recent track record is squeaky clean.
Repeated credit searches and applications:
In what may seem like a Catch-22, it can actually damage your credit history to apply for too much credit. This is because lenders will be wary of applicants who appear to be grabbing as much credit as possible, since they could potentially be an unreliable borrower. The actual number of applications which you can make isn’t set in stone, but it’s worth bearing in mind that it’s much better to choose one or two lenders to approach rather than a dozen. Of course if you’re declined you’ll have to apply again to another lender, so it’s well worth doing your homework to get an idea of what you’re likely to be approved for.
An application for credit leaves a “mark” on your credit history which is visible to anyone that searches it. However, it is possible to apply for credit with a “soft search”, that doesn’t leave a mark. Mortgage lenders will allow potential customers to submit for “pre-qualification” that outlines the general terms of the mortgage that they might be able to obtain, but doesn’t leave evidence of an application on your credit history. This is very useful when conducting research on which mortgage provider to borrow from, because it allows you to find one who’s likely to agree to your application. You can then submit a formal mortgage application to them, which stands a better chance of being accepted.
Your partner’s finances:
If you’ve ever applied for a credit product together with your partner, your credit histories will be associated. This can often be the right choice, because a couple’s combined income often enables them to borrow more than each could individually; lenders also often see couples as a safer choice than single borrowers. However, if your partner has a poor credit score this will also have a knock-on impact on your own, because you’re likely to be affected by their financial situation.
You can inform credit services to disassociate you and your partner’s credit histories if you should separate, so you won’t be joined at the hip forever. However, it’s important to discuss your respective credit scores before making any big financial decisions, to ensure that you’re applying in the most appropriate way.
What doesn’t affect your credit score?
Credit scores can sometimes be seen as something of a dark art, where hundreds of tiny factors are taken together and somehow used to create a picture of an individual’s overall creditworthiness. However, many of the factors which people think of as an integral part of a credit score don’t, in fact, play any part in it at all. Below are a few of the widely-held misconceptions which people have about UK credit scores.
“Every credit supplier gives information to credit checkers”
Loads of UK companies don’t give information on their customers to credit services, and those that do don’t necessarily give it to all of them. For instance, your phone supplier might technically be giving you credit (as you’re paying off your phone), but this doesn’t mean that this will be reported to the UK credit agencies. Therefore, you shouldn’t rely on your household bills as a means of building up credit history because in all likelihood it won’t make any difference. Similarly, missed payments don’t necessarily mean a black mark on your file (unless, as previously mentioned, they send a debt collection agency after you).
- Rent is rarely reported to credit agencies, unless you’re renting from a particularly large agency, and whether you pay on time or not is unlikely to affect your credit score.
- Council tax is not reported to credit agencies, because it isn’t a form of credit. If you fail to pay, though, you may be subject to a County Court Judgement, which will put a big mark against your credit history.
- Utility bills often are reported, but not exclusively; only 4 of the 6 main UK energy suppliers give any customer information to credit agencies, and even they don’t supply it to all of them.
“Moving house too often affects your credit score”
Your address history will be part of your financial history, since this is where your bills are sent. While credit checking services will know where you’ve lived and for how long, this has no impact on your credit score. What it does impact is your credit rating - lenders will look at where and when you’ve moved before making a final decision on whether or not to give you a loan. Perhaps a better way of thinking about this point is that while moving house often does indeed make it harder to get a loan, this won’t show up in your credit score; again, the credit score is only part of the picture, and is no guarantee that you’ll get a loan.
“If you earn more, your score will be better”
Credit checking services have no access to any information about your past or current employment, nor of your salary. It doesn’t matter how much you earn or how you earn it; all that matters is whether or not you’re repaying credit on time. Again, though, while this doesn’t form part of your credit score it will be used by banks when deciding whether to lend you money or not, and you will be asked for your salary and employment details when submitting an application for a mortgage.
“I don’t need to check my credit score unless I’m applying for credit”
It’s really, really important to keep an eye on your credit score, to ensure that the information that’s recorded about you is correct. While you might not necessarily want to check it each and every month, taking a quick peek twice a year is a good idea to ensure that no erroneous data is being entered into your record. It’s vital to check up on this regularly because of the enormous impact identity fraud can have on your credit history; unauthorised credit registered to you or even just to your address can quickly wreck an immaculate history, and it’s much better to catch this early if at all possible.
Bear in mind that any sort of confusion in your credit history can worry credit checkers, and any details which don’t match across your financial records can potentially put a question mark against your name. Make sure that your contact details, previous addresses and personal information are all entered correctly to avoid confusion.
Credit scores for expats
Credit scores play a big part in a borrower’s eligibility to take on a loan, and those who’ve lived abroad are put in a difficult situation when returning to the UK. Because countries don’t share credit records internationally, British expats looking to purchase UK property have no domestic credit history, making it difficult for them to apply for a mortgage. It’s therefore vital that any expats returning to the UK build up a decent financial history in the country as quickly as possible - simply by following some of the steps outlined above it’s possible to create a viable record in just a few months.
Expats who have the option can stand to benefit by retaining some form of UK-based credit footprint whilst living abroad. Relatives who remain in the UK will often be willing to use their address as a registered home for an expat’s UK current account, which gives them some form of a financial history whilst living overseas. This can be invaluable as a source of credit history should they later return and wish to buy property, and takes only a minimal amount of effort to set up.
UK Credit Scores
Borrowers throughout the UK must understand the role that credit scores play in applications for credit. While it’s not the deciding factor that many think it to be, an individual’s credit score is still an important part of any mortgage application, and it’s well worth ensuring that it’s kept in condition in the run-up to any request for credit.
