Martin Lewis on boosting your credit score
From buying a house, to doing up the kitchen to purchasing a new car - your credit rating can have a serious impact on those major purchases. So how can you boost it to insure you don’t miss out?
Martin Lewis is here with his essential guide - including the news that consumer credit reporting agency Experian will now include rent on your file - which means paying on time can help build your rating too.
What is credit scoring and when is it used?
When you apply for credit – which isn’t just loans, mortgages and credit cards, it’s also energy on direct debit, bank accounts, monthly car insurance, contract mobile phones and more – lenders are trying to predict your future behaviour based on your past.
They do this using the info on your application form, any past dealings they’ve had with you and information held at one of the credit reference agencies (your credit file).
If you've had problems, or you've no history to predict from, expect rejections or costlier products. Yet even if that isn’t your case, you have to understand every lender does this differently – seeing if you are likely to behave in a way that matches its wish list of what is a profitable customer. So just because one company rejects you, it doesn't automatically mean another will.
Can you find out your credit score?
Yes and no. The three main credit reference agencies all offer you a credit score – based on different measures. Yet these should be treated with a pinch of salt. Each lender scores you differently based on their own wish list of what is a profitable customer.
Many people get hung up on “my credit score has dropped 10 points because I cancelled a credit card” – yet that’s just the credit agencies guess work on a small change. Different lenders can see that differently. Many people also complain to me that “I’ve got a perfect credit score but I’ve been rejected”.
Yet your credit score misses some crucial information that lenders have on your application file. The most important one being your salary. They use that to do an affordability check, so even the best credit scorer can be rejected if they can’t afford to repay.
So see the credit score you get as a loose indication at best.
Is your credit file different to your credit score?
Yes. You have a file at each of three credit reference agencies, which details all your credit transactions, how well you repay, whether you’ve had any debts or county court judgements.
It’s important to check these at least once a year and before any major transaction for errors. You can now do it for free, via signing up to some specific credit monitoring clubs.
Experian is available for free via Martin’s Credit Club
Equifax is available for free via Clearscore
And TransUnion (formerly Callcredit) through Noddle
If you don’t want to sign up to any of the above, you’ve a legal right to get your file for free – see Equifax, Experian and TransUnion (formely Callcredit).
Tips to boost your credit file…
1. Now paying rent on time can boost your credit score. Private renters and social housing tenants can opt in to a free scheme called Rental Exchange that records rental payments on your Experian credit report. If you pay on time, it could boost your score - and therefore your ability to get a mortgage, credit card etc. If you don't pay rent on time it'll hurt your score, so think carefully about joining if worried you may be late.
The scheme's actually been running in the background for 2yrs+ with 1.2m renters' payments recorded, but the payments were only made visible in people's files last month, so it now has a real impact on how firms score you.
2. Perversely, the best way to (re)build your credit worthiness is to get credit and use it properly. Of course this is a catch 22, the question is how do you get credit if you’ve a poor credit history. Yet there are special credit (re)build cards which are easier to get like the Aqua Advance or Marbles cards. Get one of these then do £50-£100/mth of normal spending on it (never withdraw cash) and ALWAYS REPAY IN FULL each month so there's no interest (they jump to a hideous 34.9% rep APR if you don't).
Then after about six months to a year, you'll start to gain a decent history. Just ensure you never miss or are late repaying. Best way to do this is through an eligibility checker which shows you which of these cards is most likely to accept you.
3. Spread out applications: More applications especially in a short space of time can damage your credit worthiness.
4. Ensure you're on the electoral roll. If not, getting credit's tougher, as it can cause ID and tracing issues. If you're worried about junk mail, opt out of the 'open' register.
5. Beware even minor address errors. Sounds trivial, but isn't. I once did a TV money makeover for a woman looking to buy a house, who couldn't work out why she'd been rejected for a mortgage. It turned out she had an old, technically active but unused mobile still registered to her old home. That was the final straw killing her application.
6. Evidence of stability is good. While switching is something I’m usually in favour of, having a bank account for a decent length of time often helps your score, so don’t change just before a mortgage application. Plus putting a landline number down rather than mobile is good evidence of stability.
7. Beware having a joint product. If your credit file is linked to someone else through a product, lenders can see their history when you're assessed, so be careful if they've a bad history. And by the way you can’t be financially linked just through marriage. It's about whether the actual product is joint – so you've a joint mortgage, loan, bank account and sometimes utility bill.
8. Time your applications right. When you apply can have a big impact. Applications stay on your credit files for a year. Though bad stuff (such as defaults & CCJs) stay on for six. So if they lapse soon, wait before applying. Also avoid lots of applications in a short time. Spread them out and do the most important one first eg, don’t apply for a bank account first if you want a mortgage.
9. Never miss or be late on repayments. Set up a direct debit to be sure it can’t be missed, even if it’s just for the minimum (then you can manually repay more).
10. Be accurate and consistent on application forms. Lenders may verify your income and if it's wrong, you may be auto-declined. Inconsistencies over job title or mobile number can also trigger a fraud fail – another form of rejection.
11. Withdrawing cash on credit cards can harm your score. Not only is it expensive but lenders see it as evidence of poor money management. So try to avoid. The only time where it is acceptable is using a specialist overseas credit card when withdrawing cash abroad. If you don’t have one of these, then don’t do it.