Everyone should take time to manage and boost their credit score. It's no longer just about whether you can get mortgages, credit cards and loans, it can also affect mobile phone contracts, monthly car insurance, bank accounts and more.
Yet in the UK, credit ratings are shrouded in myths. This is a guide to everything you need to know about credit checks and crucially, how to boost your credit score - so you're likely to be accepted for products and get the best rates too.
The 10 things you need to know about credit ratings
The world of credit ratings is rife with misinformation and misunderstanding - even some national newspapers have got it wrong on occasion. Much of it's because lenders don't want it understood, and credit reference agencies want you to think it works a certain way so they can sell you extra products based on your fear. Here's what you really need to know to debunk the myths...
You DON'T have a universal credit rating
There's no such thing as a blacklist. This is a myth. In the UK, there's no universal credit rating or score, and there's no blacklist of banned people.
Credit scoring is about trying to predict your future behaviour
This is not easy if you've little credit history. When you apply for a product, a 'credit check' is done. In practice, this means lenders pour all the data they have on you into a complicated algorithm. It's an attempt to predict your future behaviour based on what you've done in the past.
Many people write to us incensed after rejection - "I've a perfect credit score, I've never missed a payment, why on earth did they reject me?"
What lenders really know about you
It's important to be aware of exactly what lenders know when you apply, so you can present yourself in the best light. Importantly, it's more than just what's on your credit file.
What lenders don't know about you - ignore conspiracy theories
Many people believe every element of their life is on their credit reference files, but actually it's mainly just a strict set of financial data. Though over recent years, the information contained on them has grown.
Your credit score dictates the product and the rate you'll get
In the past 10 years the credit landscape has almost completely shifted towards 'rate for risk'. This means almost every credit provider on the market uses your credit score to not only dictate whether they'll provide you with credit, but also what rate you'll get.
We don't have a right to be lent money. While the Government pushes lenders to offer more credit, especially in the small business and mortgage worlds, ultimately it's still a commercial decision from firms about whether they want to lend.
Rejection can come from fraud scoring as well as credit scoring
When you apply for a product, it isn't just a case of assessing whether you're desirable, but also checking the application is legitimate. Therefore, as well as the credit reference agencies, lenders also use completely separate anti-fraud agencies to try to weed out problems. The two big ones work in very different ways.
Don't take it too seriously. Your credit reference agency credit file is important. Its credit score isn't.
25 tips to boost your credit rating
Each lender scores you differently, so this is more art than science, especially because lenders are tight-lipped about what they're looking for. Yet there are practical things you can do that should help both reduce credit scoring and fraud scoring rejection.
PS. Have you just jumped here and ignored the 'how credit scoring works' bit above? If you can, it's worth reading that first. Knowing how the system works is the best way to boost your score.
Boosting your credit score is a bit like going on the pull
As each lender has its own bespoke criteria, think of it like a beauty parade. You need to make yourself as attractive as possible to lenders, in the hope they’ll pick you out of the line-up...
Check your files annually or before any major application
Your credit reference files, held at Equifax, Experian and Callcredit, contain enormous amounts of data on you. Errors happen and can kill applications, so it's important to check your files regularly and to go through them line by line to check nothing's wrong.
Use a credit (re)build card to build a history & restore past issues
Credit scoring is all about trying to predict your future behaviour based on your past history. Those with a poor history do poorly; but so those with little credit history, as then predicting is tough.
Register to vote or you're unlikely to get any credit
If you're not on the electoral roll, it's not just that you won't be able to vote in the upcoming General Election, it's also unlikely you'll get granted credit when you apply, so sign up immediately. You can apply at any time at Gov.UK.
The easiest way to register is online (England, Wales and Scotland only - you have to register by post in Northern Ireland) - you'll need your National Insurance number to hand. Alternatively, you can download a form to register by post which you'll need to send to your local electoral registration office.
With either method, if your registration application is received by 20 April 2015 you'll be guaranteed a vote in the 2015 General Election and will be added to the electoral roll.
How can I check if I'm already on the electoral roll?
It's quite easy. Just enter your postcode to find your local electoral registration office and contact it directly.
How is my electoral roll data used?
Many worry some councils sell on the data. But, there's actually two different registers. The full register and the open register (also called the edited electoral register).
Credit reference agencies are allowed to use the full register which you can't opt out of and that you should, by law, be on. The electoral roll can be a factor in scoring but even where it isn't, not being on it can lead to delays as lenders also use it help check your address and ID.
The open register is a second version of the register, which is mainly sold for marketing purposes. There's no credit file impact of not being on the open register, and indeed almost half of electors have opted out. You can find more information about both registers, and how to opt out in our guide to the Electoral Roll.
It's worth noting the credit scores sold to you by credit reference agencies (see the problems with paying to find your credit score) may show you've a perfect score without being on the electoral roll. Don't let that fool you into thinking not being registered won't affect your ability to get credit. It will, because of fraud scoring.
Not eligible to vote in the UK? Add proof of residency
If you aren't eligible to vote in the UK so can't be on the electoral roll (mainly foreign nationals), send all three credit reference agencies proof of residency (utility bills, a UK driving licence, etc) and ask them to add a note to verify this, but this should help you get credit.
Never miss or be late on any credit repayments - it can have a disproportionate hit
Sounds obvious? Well, it is. Even if you're struggling, try not to default or miss payments, it can have a disproportionate hit. Doing this once or twice could cause problems that can cost you for years. Defaults in the previous 12 months will hurt you the most.
Don't let your partner or flatmate's score wreck yours!
It's not usually whether you kiss, hold hands, live together or even are married that links your finances, it's simply whether you have a joint financial product.
If you've split up from someone, ensure you financially delink too
If you split up with someone you've had joint finances with (or just moved out from your flatshare), once your finances are no longer linked, write to the credit reference agencies and ask for a notice of disassociation.
This will stop their credit history affecting yours in the future.
Check addresses on old accounts
This may sound bizarre, but a wrong address can have a disproportionate impact. If you had, for example, an old mobile phone contract or credit card that you don't use any more, but is technically still listed as active on your credit reference files, then check the address is your current one.
Don't 'spend' your applications too often
Every time you apply for a credit product (be it a credit card, contract mobile phone, car insurance paid annually or more), it adds a footprint to your file for a year.
Always check your credit files after rejection
There's a nightmare scenario you need to avoid called the rejection spiral. It works like this:
Minimise credit card applications by doing a free eligibility check
The only way to know if you'll get accepted for a product is to apply. Yet that leaves a footprint on your credit file, and too many of those, especially in a short space of time, can hurt future applications. This is a catch-22, as if you get rejected, or the rate you're offered is crap, you'll want to keep applying.
Time it right - when you apply can have a big impact
Problems such as county court judgments and bankruptcy stay on your file for six years, and data about applications for one year. So if you're near a time when old issues will lapse, holding off applying can help. Check your credit file for details.
Don't withdraw cash on credit cards
This is both expensive to do, as interest is higher and you're charged it even if you repay in full each month. Crucially, many lenders see it as evidence of poor money management skills.
The one exception is withdrawing cash on a specialist card abroad. See Overseas Credit Card ATM Withdrawals for full info and why they're not too bad.
Payday loans can kill mortgage applications
Some payday lenders disingenuously suggest that taking them out and repaying on time can boost your credit score, as it starts to build a history of better repayment. This is true to a very minor extent for those with abysmal credit histories - though using a credit rebuild card correctly is generally both more effective and far cheaper.
You can ask why you were rejected
If you apply for credit and are rejected, lenders are supposed to give you an explanation if you ask for one. It's worth doing, but usually you just get "because you failed to meet our credit scoring requirements", which makes a chocolate fireguard look useful.
Never pay for a credit repair company
If you see these advertised, avoid them. Either they're doing nothing you can't do yourself with ease, or they're using illegal methods that will bite you on the bum. If you're struggling and need personalised, professional help, see a non-profit debt counselling agency.
Stability counts, use a landline or mobile, don't overchurn
Homeowners rather than renters, and those who are employed, rather than self-employed, tend to be more readily accepted for credit.
Life change coming? Apply before that happens
You also score higher on lenders' wish lists when you're earning, so if you may be going on maternity leave, taking time off, or if you suspect potential redundancy, apply beforehand - though never lie about your details.
Cancel unused credit and store cards
They can kill your application. Access to too much available credit, even if it isn't used, can be a problem. If you have a range of unused credit cards and lots of available credit, it could be a good idea to cancel some of them. This lowers your available credit and should help.
Reduce your debts with savings, if you have them
The amount of outstanding debt you have is part of the information lenders have access to. If you've too much debt, then that hurts your file. After all, would you want to lend to someone who already had a lot of debts to pay elsewhere? So minimising this is a clever strategy.
Default on your file - mitigate the damage
One of the major problems people face are defaults on their credit reference files - in other words, when it shows you didn't pay but should have done. These, especially if they're recent, are a hammer-blow when applying for new credit.
Unfair default or other error on your file, you need to fight it
If you discover an unfair default on your credit file, then you need to dispute it as it will block most applications. Check whether the same default is reported with the other two credit reference agencies as well.
Paying for insurance monthly will affect your credit score
If you decide to pay for insurance in monthly instalments, a 'hard search' will be carried out and this will affect your credit score. It's always worth paying upfront if you can - some insurance providers charge APRs of up to 40% if you pay monthly.
Ask for a 'quotation search' or 'soft search' if available
If you're just trying to get a specific quote for a loan, ask the lender to do a 'quotation search' or a 'soft search', not a 'credit search'. This means that while an enquiry will appear on your file, only you can see it. Lenders can't, so it won't have an impact on your credit score.
Sadly, many lenders haven't yet adopted this practice, but it's worth asking. If not, consider whether you really want to get a quote - if it's unlikely you'll get the product, don't bother.