A credit score is a reflection of your financial behaviour. It defines your capability of borrowing a loan, credit card or any other financial product. Put simply, the better your score, the better rates you will be offered. Although each lender has its lending criteria, they do look into your profile to know about the kind of relationship you share with finance. If you have a bad credit score or you want to build your credit card from the scratch – you need to understand how credit score works.
How is a credit score calculated in the UK?
The credit scoring system in the UK is a little different from other countries. There is not a single credit score of an individual. Rather there are 3 different Credit Reference Agencies (CRAs) who calculate the credit score of an individual. Lenders can choose to get the information from any one of these three to assess an application.
Lenders look at your credit profile that discloses how much credit you have had in the past and did you repay the debt? If yes, did you make all the repayments on time? All this information into an algorithm to help them calculate the scores.
What goes into your credit report?
It might sound very simple that a “3-digit” number is all lenders assess to make their decision. But there are a lot of things that build your credit report.
1. Personal information
Your name, address, employment status, monthly/yearly income and other essential information are included in your report. It gives a lender a clear image of your social and professional life and also makes it easier for them to make a decision.
2. History of credit
Your past behaviour with a lender is a major determinant of your loan application decision. A credit report contains every detail like who you had borrowed from, did you repay them, did you make repayments on time, and did you ever miss any payment date, among other things.
Whenever you apply for a financial product, the lender, or the financial institution will perform a credit check on your profile. And each check will leave a footprint on your report. A lot of footprints over a short period may indicate that you are struggling with your finances.
4. Legal Judgements
Events like County Court Judgements (CCJ), bankruptcies, and Individual Voluntary Arrangements (IVAs) are also registered in your report. Public records like whether you are registered on the electoral are also included in it.
How to improve a credit score?
Although every important piece of information goes into your credit report – there’s good news. You can improve your score and there are several ways to do it. Your credit score may be one of the reasons your loan application is getting rejected by the lenders. Here are a few tips to improve your ratings:
1. Register on the electoral roll
Get yourself registered on the local Electoral Registration Office as it helps in improving the score. After the registration, you will become a registered voter for the address. When lenders assess your profile they can easily verify the information that you have provided them with. Checking your name on the electoral register is one the easiest way to boost the score.
2. Do not make multiple applications
Space out when you are applying for personal loans or credit cards. Do not apply to multiple lenders or financial institutions simultaneously or within a short period. Multiple applications mean multiple credit checks – and that will ruin your credit score.
3. Fix your credit report
Scan your credit report regularly and if you spot any errors on it, get it corrected from any Credit Reference Agencies. There may be errors on it and you may not be aware of that. Ensure that you check your report at least once a year.
4. Make repayments on time
When you borrow a personal loan or a credit card, make all the repayments on time and in full. Do not miss any repayment date as missing a payment indicates that you do not afford the loan.
5. Close old accounts
Close the accounts and credit cards that you no longer use. Suppose you have already paid off the debt of your credit card, and you are not using it anymore. You do not have any plans for using it. Then it’s better to close the account.
How long does it take to improve a credit score?
Remember that there is no “quick fix” to boost your credit score overnight. How long it will take for the score to improve depends on the individual. For some people, it could take only a few months, while some others may take several years to rebuild their credit score.
If you are serious about the financial difficulties that you may face due to a bad credit score, you have to be committed to improving it again. Another thing is the frequency at which lenders and other organization report your financial activities to the CRAs.
Having a poor credit score may impact various areas of your life. Your creditworthiness increases if you have a good credit score. Be a responsible borrower to protect your credit score.