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Credit Scores

Bust myths & improve your score

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Martin and Amy | Edited by Johanna

Updated March 2018

Risk vs reward

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 & get the best rates too. PLUS our revolutionary free MoneySavingExpert.com Credit Club gives you a free Experian Credit Score and explains what it means in the real world.

We've got another guide if you're looking for how to check your credit report for free.

What is a credit rating? Plus nine other things you need to know...

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

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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.

Each lender scores you differently and secretly.

This means just because one lender has rejected you, it doesn't automatically mean others will. Though after a rejection, it's always important to check your credit file for errors before applying again.

Of course, if you've got a poor credit history, or had problems, it can feel like you're blacklisted. Credit scoring is intuitive – would you lend to someone with a history of not repaying?

However, on occasion there are firms that specialise in lending to those who have had past problems – though they then charge a whacking rate.

The tools lenders use to decide aren't universal either. As well as your credit file, they also look at application information and any past dealings they've had with you, and use the three sources of information to build up a picture of you.

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.

While a poor history counts against you, so does having little credit history as it makes predictions less certain.

Imagine you are lending someone money. On the surface, they may appear trustworthy. But if you don't have much information about them, then you probably want to know more, just to be sure.

Credit scoring is about future behaviour

That's why one of the key challenges for some is to build a credit history – it's not easy if no one will give you credit. If you're in that situation, you can find help on how to build your credit history – it's aimed at students and younger people, but the theory applies to everyone else too.

It's as much about 'will you make the lender money' as it is about risk

What lenders know about you!

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?"

This is based on a misunderstanding that lenders are credit-scoring to see if you match up to their wish list of what makes a profitable customer. Of course, someone who is a bad risk is likely to be scored out as unprofitable by most companies. But the risk of not repaying isn't the be-all and end-all.

  • Credit card companies may reject you for always repaying cards in full.

    You might feel like a dream punter, but for credit card companies you're a nightmare. If they spot this trend, you could be rejected. The most profitable customers are those perpetually in debt, never defaulting, but always meeting the minimum repayment.

    Pay off in full every month, don't use your cards enough, or always shift debt to 0% cards, and if they can spot you (it isn't always that easy), a few may reject you.

  • Banks score you based on products they'd like to sell you in the future.

    Imagine a bank wants new mortgage customers. That's a costly sell. Instead, it offers a current account paying a high rate of interest on a small amount kept in it. Yet, when you apply, rather than scoring you as a bank account customer, it could actually be scoring to see if you're likely to be a profitable mortgage borrower in the future – you might face rejection if you aren't.

The secretive nature of credit scoring makes this difficult to ever truly know.

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.

  • Application form

    The application form

    In many ways this is the most important. Here, lenders obtain the crucial details of your post code, salary, family size, reason for the loan and whether you're a home owner.

    Make sure you fill in the forms carefully. One slight slip, such as a "£2,000" salary rather than a "£20,000" one, can kibosh any application.

    Be consistent too, fraud scoring firms filter applications and if there are many inconsistencies – such as changing your job title each time or different phone numbers, it can cause a problem that you may not be told about.

  • Past dealings

    Past dealings you've had with the lender

    Companies use any data on previous dealings they've had with you to feed into the credit score. This means those with limited credit history may find their own bank more likely to lend to them than others.

    Of course, those who've had problems with a lender in the past may find it more difficult to get accepted there too.

  • Equifax, Experian, and Callcredit credit reference agency files

    The three UK credit reference agencies compile information, allowing them to send data on any UK individual to prospective lenders. All lenders use at least one agency when assessing your file. This data comes from four main sources:

    Electoral roll information

    This is publicly available and contains address and residence details.

    Court records

    County court judgments (CCJs), decrees, IVAs, bankruptcies and other court debt orders indicate if you have a history of debt problems.

    Search, address and linked data

    This includes records of other lenders that have searched your file when you've applied for credit, addresses you're linked to, or other people you have a financial association with.

    The big gas and electricity firms do hard credit checks – these go on your file too.

    Account data

    Banks, building societies, utility companies and other organisations use credit reference agencies to share details of all your account behaviour on credit/store cards, loans, mortgages, bank accounts, energy and mobile phone contracts from the last six years.

    About 350 million records a month are tracked. The first type of information and the most common is 'default data', which shows where you're officially in default.

    Some lenders share 'full data' too. This can incorporate how you generally operate the account, from being the model customer to defaulting. Some, including Barclaycard, Capital One, GE Money and MBNA, share the amount you repay too (if it's the minimum, or if you repay in full) and whether you've a promotional deal (plus if you use credit card cash advances, which you NEVER EVER should). This can mean lenders can better weed out those just playing the system.

    In addition, payday loan data is now normally reported, while doorstep lenders are legally obliged to share the data that they hold on you.

  • Some history from energy/phone providers

    If you look to switch energy provider, or change from a prepayment meter to a normal credit meter (where you get a bill), it's likely to leave a footprint as many providers now share credit report data. See the Cheap Energy Club for help.

  • Fraud data

    If you've committed fraud (or someone has stolen your identity and committed fraud) this will be held on your file under the CIFAS section.

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.

So let's debunk some myths. Here are a few of the more common things people think are on their files, but aren't.

'Soft searches' (you see this, lenders don't)

Student loans (except pre-1998 starters)

Council tax arrears

Parking or driving fines

Who you're married to or living with

Declined applications

Some defaults or missed payments

PPI, CPP, bank charges and other reclaims

Whether you've checked your credit file (you see this, lenders don't)

Race, religion, ethnicity

Salary

Savings accounts

Medical history

Criminal record

Child Support Agency payments

Remember, if a lender asks you about it on its application form then, it can find out about it – and lying is fraud.

Your credit file 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 file to not only dictate whether they'll provide you with credit, but also what rate you'll get.

Rate for risk

The most obvious way this manifests itself is in representative rates on loans.

Here, only a minimum of 51% of accepted customers must get the rate advertised. They might be advertising a 6% rate (known as the representative APR). But you could be accepted and offered a 40% interest rate instead, because of a poor credit score.

It applies to other products too. Some 0% credit cards give you a shorter 0% period if you've got a poor credit history (assuming they'll accept you), others will simply offer you a different product to the one you've applied for. This is why it's so important to manage your creditworthiness.

'I am not a number, I'm a free man!' – Er, not with credit scoring

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.

This is done with a massive system of automated impersonal credit checks. It's often far cheaper for a lender to reject some people who it should be lending to than it is to accept some it shouldn't be lending to.

You may feel it's unjust, but The Prisoner's call – "I am not a number, I am a free man" – doesn't work in credit scoring. Here you are just a number, and you have to understand that, as frustrating as it may seem.

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.

National Hunter

National Hunter

This rarely mentioned system's much less factual, and so is prone to greater errors. However, it's used by almost all major banks and building societies, receives 100,000 applications a day and has a real impact. Find out more about how National Hunter works...

CIFAS

CIFAS: Lists confirmed past fraud

It is simply a record of known fraud, so if you're on there, in general, you should know about it. It's also the organisation to speak to if you think you've been a victim of ID fraud. Worryingly, any fraud committed at your address in the past could appear on your CIFAS file, even if it was nothing to do with you. Find out more about how CIFAS works...

For more information on ID fraud protection, see the Free ID Fraud Help guide.

Credit reference companies will try to sell you a credit score

Don't take it too seriously. Your credit reference agency credit file is important. Its credit score isn't.

Credit score vs. Credit file

Credit reference agencies used to make all their money from selling data to lenders. The idea was to help lenders predict your behaviour, which allowed them to assess whether or not you were a good person to lend to.

Then some bright spark at the credit reference agencies realised they could generate a business called "consumer credit management". It meant they could start to sell you all the other sorts of data and monitoring products for the first time. Why do they sell it to you? Well, it makes them money.

Part of this is selling people a "credit score". Yet that isn't a true indication because, as we've stressed, each lender scores you differently and they have far more information than just what's on your credit file.

Credit scoring affects far more than you think

Since the credit crunch started, way back in 2007, the importance of credit scoring to our financial lives has grown rapidly. Here's a quick rundown of how credit scoring affects major financial areas.


Boost your credit rating

27 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.

The MSE Credit Club – which includes Experian Credit Report

MSE’s Credit Club

Our revolutionary free MoneySavingExpert.com Credit Club helps you keep a track of your credit record. You can sign up here - here's what it does:

  • We've launched the ability to get your full Experian Credit Report for FREE within Credit Club. See our full details on how this will work.
  • You'll get a free Experian Credit Score. This will give you an indicator of how lenders see you when assessing you for credit applications.
  • Our unique affordability score. This clever tool will help you work out how much you can afford to borrow, using calculations based on your income and estimated spending.
  • Our unique Credit Hit Rate – this will show you your chances of success, expressed as a percentage, of grabbing our top cards and loans.
  • Eligibility tool to show your best credit deals. It reveals the likelihood of you getting top credit cards or loans.
  • Wallet workout tool to check if you’re on the best credit products for YOU.
  • Your credit profile explained. It shows the key factors affecting your score and how to improve them.

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...


Jane Bank & Sarah Lender are on the pull. Neither like overweight men, and both like dark hair and good looks. Yet while Jane prefers intense guys with stubble, Sarah likes 'em clean-shaven with a sense of humour. So while there are lots of guys they both reject, and some they both lust after, they can still end up fancying different blokes.

It's like going on the pull!

Credit scoring's the same. Different lenders want different things, so one rejection may not mean a rejection by all.

Some borrowers are unattractive to almost all lenders (ie, most will turn down bad risks). However, a small few may have a fetish for those with poor credit histories as they can charge more.

And sadly for those rejected, just as when the guys ask Sarah or Jane why they're not interested, they just say: "'Cos I don't fancy you," and that's about it. We don't always get to know other than: "Your credit score wasn't high enough."


So the tips below are to make sure that lenders see you in the best possible light. So when they're looking at you, you're always dressed up to the nines, looking as hot as you can, and your skirt/shirt isn't tucked into your pants without you knowing.

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.

If possible, check files at all three agencies (or at least the big two, Experian and Equifax) as different lenders use different agencies – and don't assume the info will be identical on each.

While you have a statutory right to check your files for £2, there is a way to do it for free, or even be paid. See our full Check Credit Files For Free guide, which also includes info on what to check.

Are you due £100s back from Experian's CreditExpert?

If you pay or have paid for Experian's £15/mth credit monitoring service, we believe you may have been unfairly sold part of it. The Credit Expert Reclaiming guide shows you how to get the cash back.

Register to vote or it's much harder to get credit

If you're not on the electoral roll, it's much harder to get accepted for credit, so sign up immediately. Don't wait for the annual reminder, apply at any time on Gov.uk.

Register to vote

Simply follow the instructions online – it'll ask you a series of questions aimed at identifying you, and the local electoral borough you need to register with. Note that you'll need your national insurance number to hand.

Many worry some councils sell on the data. But you can opt out of the edited electoral register which can be used for marketing.

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 to help check your address and ID.

It's worth noting the credit scores sold to you by credit reference agencies 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 lenders also need to be sure you are who you say you are.

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 non-Commonwealth and non-EU 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. This should help you get credit.

Some foreign nationals (from Republic of Ireland, some Commonwealth countries and EU citizens) are allowed to vote in local elections, and therefore can be registered on the electoral roll in the normal way.

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.

Never miss credit repayments

The easy solution is to pay everything by direct debit, then you'll never miss or be late. While we normally caution against only making minimum repayments on debts (as the faster you repay, the less the total interest – see the Danger: Minimum Repayments guide) one technique is to set up a direct debit to just repay the minimum, purely as a vehicle to ensure you're never late. Then manually pay more each month on top.

If you are in difficulties, the clichι "contact your lender" is a good one. Hopefully it will try to help. Changing your repayment schedule is preferable to you defaulting – and though it will hit your credit score, it's better than a county court judgment or decree against you.

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.

Financial link

If you are financially linked to someone on any product, that means their files can be accessed and looked at as part of assessing whether to accept you. Even just a joint bills account with flatmates can mean you are co-scored.

Therefore if your partner/flatmate has a poor history, keep your finances rigidly separate, and it should maintain access to good credit for you.

There are currently only four products that can infer financial linking – a joint mortgage, a joint loan, a joint bank account (not savings as they don't go on credit files), and in certain circumstances, your utility bills. Being jointly named on a bill with a flatmate shouldn't mean you are financially linked – this should only happen when the energy firm is confident you're a couple (eg, when your bills are addressed "Mr and Mrs").

It's worth noting that while many people think they have a "joint" credit card, these technically don't exist. It's one person's account, the other just has a second card to access it.

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 flat-share), once your finances are no longer linked, write to the credit reference agencies and ask for a notice of disassociation. You can also call up or find the forms online.

This will stop their credit history affecting yours in the future. However, the agencies say they can't do this if you still have a joint account open with the ex. The account'll need to be closed or transferred to an individual account before you can do it. For example, a joint loan would have to be paid off before a notice be given.

Minimise credit applications by using our free eligibility calculators

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.

Martin's given evidence to parliamentary select committees on this unfairness, but little's been done. So to fight back, we've built free eligibility calculators to help you.

Eligibility tools

These use a soft search (so you see it on your file, but lenders don't so there's no impact) to show your odds of acceptance for the top cards (and loans), so you can hone and minimise your applications.

We also have a loans eligibility calculator, which'll help you find your chances of getting different loans...

You only need to fill in your details once using the eligibility calculator to find your chances for all cards from the card category you click on. The loans eligibility calculator is separate, so if you're looking for both cards and loans, you'll need to use both calculators separately.

What are good odds?

Anything above 70% means you've a very strong chance of getting the card. Anything above 50% is also pretty reasonable. Anything below, and you're taking a chance.

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.

If the account is still listed as open, and it lists you as being at a different address, this can stymie applications due to ID checks. Check your file and go through every active account's address to ensure it's up to date.

We've known people being rejected for mortgages because of this. Worse still, they didn't know the exact reason why as that's a nightmare to find out.

Don't 'spend' your applications too often

Space out your applications

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.

Too many, especially in a short space of time, can trigger rejections as it makes it look like you're desperate for credit.

Therefore, space out applications if you can and don't do them frivolously.

In fact it's almost worth thinking about applications as 'spending'. Is it really worth spending an application on what you're doing, or could you save it for something else?

So if you fancy a cashback credit card and have no other credit you need to apply for in the next six months or so, great, spend your application. But if you're just about to apply for a mortgage, wait until after you've done that. Prioritising is important.

For the same reason, if you apply for a cheap credit card and don't get the credit limit you need, don't automatically apply for another one. Read the Low Credit Limit guide for more information.

Always check your credit files after rejection

There's a nightmare scenario you need to avoid called the rejection spiral. It works like this:

The rejection spiral

This continues, until finally you check your
files and get the error corrected.
So...

You apply again.
You're rejected, not due to the error, but because of recent 'searches'.

If you're rejected once, check your files are correct immediately. Otherwise you may mess up your score for an age, as more applications mean more searches, compounding the problem. You'll be told by the lender which credit reference agency it used to assess your info, so focus on that one.

After an error, it's possible to get successive searches wiped, but it involves negotiating both with the agency and the lender, and it isn't easy.

MSE eligibility calculator

The rejection spiral also applies when you apply for credit normally reserved for those with an excellent score when you, say, only have a good score (sadly, many lenders don't publish their criteria so it's difficult to know in advance).

If you're thinking of applying for a new card, check our best buy credit card guides. Our eligibility calculator is in our loans guide and most of our card guides, and gives an indication of which loans and cards are likely to accept you, plus those likely to turn you down.

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 do those with little credit history, as then predicting is tough.

You need to build a decent recent history to show that you can be responsible with credit and use it well. The catch-22 is that as you have a poor credit history, getting credit is difficult.

The solution is to grab a credit rebuild card. See the full Credit cards for bad credit guide for full help, how to protect yourself, and top picks.

Rebuild your history

This is a card with a hideous rate, say 35% APR, which accepts people with a poor credit history. Yet provided you repay the card IN FULL each month, preferably by direct debit, and never withdraw cash, then you won't be charged interest, so it's no problem (don't do this if you're planning to do either of those).

Then just spend say, £50 a month on the card, and provided you have no other issues after six months or so, things should start to improve. After a year, it should make quite a difference.

Obviously, if you already have a credit card you aren't using, then you can do the same on that without the need to apply for a new one.

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.

Make paying your rent boost your credit score

Do you pay your rent on time? If so, there's a free scheme which millions of private renters can use to make paying rent boost their credit rating.

Private tenants can opt into the free Rental Exchange scheme. Launched in March 2016, it records your rental payments and sends the results to credit reference agency Experian. We explain the scheme in our new Make your rent boost your credit file guide.

How does it work?

You pay your rent to a third party called Credit Ladder. Credit Ladder passes on your payment to your landlord or lettings agency, and tells credit reference agency Experian whether you've made the payment on time. Experian then updates your credit file accordingly.

If you know you'll be able to pay on time and you're trying to improve your credit rating or build up a credit history, this can be a clever way to make your rental payments count towards that (though it's early days, and even if you sign up now, lenders won't actually start seeing the data until the end of this year). Of course, if there's a risk you're going to miss payments it could harm your rating.

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.

Payday loans can kill mortgages

If you're getting a mortgage though, by definition you'll need a far better than abysmal credit score. So you should avoid payday loans like the plague. Not just because they're hideously expensive – see the Payday Loans guide – but because some mortgage underwriters (the ones who decide if you'll get a mortgage) have openly said they simply reject anyone who has had a payday loan, as it's an example of poor money management.

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 consistent details between applications, don't overchurn

Homeowners rather than renters, and those who are employed, rather than self-employed, tend to be more readily accepted for credit.

Staibility counts!

Putting a fixed (land)line rather than a mobile number on application forms can help with security checks and improve your chances. Being with the same employer, bank and current address for a while all help too.

Keep personal details the same between applications. It's crucial to be consistent, even over long periods, when you fill in application forms. If you have a number of job titles or phone numbers, try to use the same one on every form. If you use different ones, you might be flagged up by fraud scoring.

Lenders can't reject you just for this, but they should tell you if National Hunter has been a contributing reason why they declined you for credit.

Life change coming? Apply before that happens

Life change incoming! 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.

However, just to complicate things, long-standing bank accounts with good credit histories can be a benefit to your credit score, so they're often best left open. There's no definitive answer as to whether you should close down your old cards, because all lenders are different. But, look to strike a happy medium – if you've lots and lots of unused credit, close some cards down, but don't close 'em all. And above all, don't max out. Cancel Old Cards has full info on what to close and when.

If you need to cut credit card debt costs, first check if the old cards will let you shift debt from other cards to them cheaply, as you then won't need to apply for new credit. This helps your credit file, and means you're using your existing credit more efficiently.

See Existing Customer Balance Transfers for full info.

Reduce your debts with savings, if you have them

Pay off debts

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.

In general, you'll be better off using savings to pay off expensive debts anyway (read Pay Off Debts With Savings to find out why).

This is particularly true if you're applying for a mortgage – the less you're borrowing in proportion to your house's value, the better deal you can get.

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.

If the default shouldn't be there, read how to challenge unfair defaults. If it's genuine and fair, your options are limited. After all, credit reference files are there to show lenders your history.

There are two main routes...

    Negotiate or wait
  1. Negotiate with the lender. If you're prepared to settle the debt, in part or in full, then you can negotiate with whoever you owe the money to. You can also ask to make it a condition of settlement that the default is wiped off your credit file. If you're not sure, speak to a non-profit debt-help agency.

  2. Let time heal it. The other route is to allow time to heal it – defaults stay on your file for six years, but even before that, the longer ago the default was, the less impact it has, especially if your more recent credit behaviour has been impeccable.

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.

Unfair defaults can occur for a number of reasons. It could be a simple clerical error by the credit reference agency, in which case contact it to get it removed – they are usually helpful.

More likely, though, is the lender has put it there in error, or that you were in dispute with the company over whether you owed it the money or not.

Try the following tactics:

  • Complain to the lender

    Complain to the lender that put it on your file.

    Write to the company which put the default on your file to ask for it to be removed, telling it your reasons why the default is unfair. Keep this formal, polite and to the point. And tell it you'll be taking it to the Financial Ombudsman if the default isn't removed.

  • Add a notice of correction to your credit file(s).

    If that fails, add a notice of correction to the file explaining the problem, eg, "it was a joint account and the debt was run up once I had split from my ex-husband/wife," or "the debt was for a pair of shoes from a catalogue company that never arrived so I refused to pay it".

    Don't go on too much when explaining the error. Be concise and factual.

    The notice will slow applications down, as most companies will look at it manually. But as a substantial default is likely to stop you getting credit, that's usually not a problem.

  • Complain to the relevant Ombudsman.

    Financial Ombudsman

    Most complaints about credit reports - as they're most likely to be about banks, insurance companies or other lenders - should be addressed to the Financial Ombudsman. It can adjudicate that the default is unfair and ask for all traces of it to be removed (and order recompense for damage if appropriate).

    If your complaint is with an energy company – perhaps it's saying you owe it money when you don't, leaving a mark on your report – then you can also take it to the Energy Ombudsman. Similarly, the Communications Ombudsman will help if it's a broadband or mobile company. Both can order companies to remove information from your credit report.

    For help in making your complaint, see our Complaining To The Financial Ombudsman guide.

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.

However, many people also worry that using comparison sites will also affect their credit score. Comparison sites share your information with a number of insurers. They look at your credit file to check who you are, provide you with quotes and to see if you would be able to meet monthly payments.

Yet the good news is that these searches are 'soft' searches, so other lenders DON'T see them and they won't affect your credit rating, Only you can see the search has been done.

For more information on this, including how to avoid it, see our Car Insurance guide.

Ask for a 'quotation search' or 'soft search' if available

Soft searches

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.

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