20 August 2019
Applying for personal loans and their impact upon credit scores are often talked about hand-in-hand, and for good reason. It’s important to understand what a credit score is and how you can improve your own score to ensure you’re in the best possible financial situation when applying for credit.
A higher credit score improves your chances of being accepted for a variety of financial products at the most competitive interest rates (including mortgages, credit cards and personal loans), so it’s beneficial for you to understand how to work on your credit score to ensure it’s the best it can possibly be.
What is a credit score?
Firstly, you need to understand exactly what a credit score is before you can look at ways to improve it. A credit score is a 3-digit number (although this can vary depending on which Credit Reference Agency you choose to use) that shows you how likely you are to be accepted for credit. It’s a figure based on your Credit Report, which is a completely separate record of how you’ve handled your personal credit commitments in the past, as well as detailing other key aspects of your financial history, such as any Insolvencies or County Court Judgements that may have been recorded against you.
Your credit score is calculated by a Credit Reference Agency (CRA), which has access to all of your historical financial information and other applicable public records. Once the CRA has enough of this suitable information, they will generate your Credit Report and calculate your credit score. Your credit report and score get updated with the latest information about your borrowing each month.
What’s important to realise is that while your credit score is a rough indicator of how “good” your credit report looks, buffa and many other lenders don’t actually use the score to make lending decisions. Instead, lenders look at the real information on your credit report, and might create their own scores that are different to the ones you can see from the CRAs.
Improving your credit score
Now we’ve covered what a credit score actually is, let’s look at the most effective ways to both build and look after your personal score. The good news is, there are plenty of things you can do to improve your credit score over time. Here are our top tips:
1. Use Credit Cards little and often
Although irresponsible use of a credit card can negatively affect your credit score, using it regularly and responsibly is a very useful way to build your overall credit score. Making sure that your credit card is active and ensuring that you make regular repayments on time to prove that you are able to reliably pay back and maintain an ongoing source of low-level credit will certainly be favourable to your overall credit score.
2. Register to the Electoral Roll
Ensuring that you are registered to the electoral roll can greatly improve the way you are viewed by providers of credit, as this acts as an additional method of verifying both your identity and your personal housing situation. Being clearly verified as someone with a constant place of residence is appealing for all types of credit providers and is likely to improve your chances of borrowing money. If you are not currently registered on the UK electoral roll, you can do so here.
3. Get your name on some Bills
Many regular bills that many of us have to pay, including telephone bills and other utility bills such as Electricity and Gas count as a form of credit for the purposes of a personal credit profile. With own your name registered for some of these types of ongoing utility bill payments, you are once again proving to potential credit providers that you are a reliable and credit-worthy individual if you are able to make payments in a timely and consistent manner.
4. Avoid making multiple Credit Applications in a short space of time
Every time you make a full application for any form of personal credit, with your permission a search can be carried out on your current credit report in order to allow the credit provider to make a decision regarding your credit worthiness. As a result of this a ‘footprint’ is left on your credit report to highlight that you have applied for a new form of credit. Whilst applying and being accepted for credit is a positive thing for your credit report, multiple applications for credit during a reasonably short space of time can very negatively impact your overall credit score.
This is because these multiple applications can give the impression to credit providers that you are in severe or desperate need of financial assistance, and it’s not in their or your own interest for them to approve your application under those circumstances. It is therefore important to note that you should wait some time (ideally at least a month) to re-apply for any other forms of personal credit after a rejection, and also ensure to check that your credit report information is completely accurate before doing so.
5. Keep your Credit Utilisation minimal
You can improve your credit score by only using a small amount of the credit you have available to you. Sticking to below 30% of your total credit available for items such as Credit Cards shows that you are able to maintain and manage your credit sensibly, making you much more appealing to credit providers than if you are often seen to be ‘maxing out’ your available credit sources.
6. Check for mistakes on your credit report
Any mistakes, even if they are minor, on your credit report, for example an incorrect past address, can have a surprisingly big impact on your overall credit score. Ensure you check regularly (at least every 6-months) with a Credit Reference Agency that all of your details are up to date within your credit report and advise them of any incorrect or missing information immediately.
7. Check for fraudulent activity
Similar to the need to check that your personal details are correct, if you notice something on your credit report that doesn’t quite add up, for example, if you notice a recorded application for credit using your name which you don’t recognise, contact the Credit Reference Agency immediately. They can then in-turn ensure that your report is updated as necessary, as well as providing you with more details of the potentially fraudulent credit applications that you are unsure of or do not recognise. You could have future credit facility applications rejected due to fraudulent activity on your credit report, so checking this regularly for any suspicious or unrecognised activity is a very important step to take.
8. Keep your address details up-to-date on all credit agreements
It’s very important to keep your address details properly updated with any ongoing credit agreement product or service you regularly pay for whenever you move home, and to make sure your address is on file in the correct format consistent with how Royal Mail has your address listed. Your credit report is the sum of your credit files at all your previous addresses, and they need to link together neatly to create an accurate picture.
It’s important to consider what you can do to increase your credit score in order to help your applications for other forms of credit in the future. Small changes can have a huge impact, so try out a few of our tips above to get your credit score on the path to top-notch health.
It’s also important to remember not to panic if you discover that you don’t have a perfect credit score. As we’ve highlighted above there are steps you can take to address this over time and credit scores continue to evolve with you as you take positive steps to address them.
At buffa, we do consider each loan applicant on a case by case basis, so even if you have a bad credit rating, you could potentially still get a loan with us. If you require further information on our personal loan services, contact us today.