You’re probably aware that the strength of your credit history is important because it affects your likelihood of being approved for things like mobile phone contracts, mortgages, credit cards and loans — as well as impacting the cost that these products will be offered to you.
But you may not know that your credit history is also important for identification. For example, a recent BBC article shared the story of Laura McCormack who was apparently denied a home Covid-19 test because a credit check done with the credit reference agency was unable to prove her identity.
Many employers also run credit checks on prospective employees during the recruitment process. And landlords too will credit check their potential tenants prior to offering them a lease.
Why do they do this? It’s a way to reduce risk by checking that you’re in a financially stable position, and also a way to reduce fraud by confirming you are who you say you are.
So as your credit history can impact not just your ability to get credit, and at a good price, but also your health, your job prospects and your home — it’s clearly important to ensure it’s in a good state.
What's the difference between a credit history and a credit score?
Most people think of their credit history as a record of their past credit arrangements (to include mobile phone contracts, loans, credit cards, overdrafts and mortgages), as well as a log of payments made and missed. However it’s not just financial information that’s captured here. There is also a log of personal data, like your address history, and whether you’re on the electoral register to vote, or not. (For more on this check out our blog: What other data goes into your credit file?)
When you make an application for a credit agreement, like a mortgage, the lender reviewing your application will check your credit history to help with making a decision about whether to lend to you or not — and at what rate. By doing this they’re looking to assess the risk involved in lending to you by working out how likely they think you are to pay the money back, and on time.
To help them with this they have an algorithm that they run on your credit history.
The problem is, we don’t know what that algorithm is, and it’s damaging for us to be denied credit. So we want to know before we apply, how likely we are to be accepted.
Therefore to give an indication of how likely you are, based on your credit history, to be approved for a credit agreement, the Credit Reference Agencies or CRAs for short (these are the companies that collect your credit history) developed the credit score.
In calculating your credit score the CRAs attempt to recreate the lender algorithm to help you understand how a lender might view the information contained in your credit history, on a simple to understand scale. Therefore while a credit score is useful for people in predicting their outcome ahead of a credit application, it’s important to note that it’s not the credit score that lenders will look at. Lenders will look at the credit history. That said, an increasing credit score is a sure sign that our credit history is improving.
You can find out more about this in my video here:
What is my credit score anyway?
The first step to improving your credit score, is to find out what your credit score actually is (if you don’t already know).
As mentioned above, your credit history is collected by the three main Credit Reference Agencies (CRAs) in the UK – Experian, Equifax and TransUnion – and each owns a separate credit report about you. Because they each have a slightly different way of calculating your credit score, your score will be different in each case. And because differences between your three reports can damage your chances of getting credit, it’s best to check all three.
It’s free to check your credit reports online, and you can try it now using the following services:
- ClearScore (uses Equifax data)*
- Credit Club (uses Experian data)
- Credit Karma (uses TransUnion data)
* Just to be super transparent if you sign up and follow this link although it’s free for you, Loqbox may get a small referral fee from ClearScore. This helps us to continue to improve our service for our customers and keep Loqbox free.
How to improve your credit score in 8 steps
1. Make payments on time
An obvious one but it’s so important it begs repeating. Missing payments really damages your credit score, so make sure you’re paying them on time. If you’re struggling to make payments then get in touch with the organisation in question and discuss with them your options. Many companies are more than happy to work with their customers to structure payments in a way that works for them. So don’t leave it until you’ve defaulted to have a conversation where possible.
2. Register to vote
The electoral roll isn’t just for voting. It helps prove your identity. And being registered at the same address for a while demonstrates that you’re stable, which lenders love. You can find out how to get on the electoral roll here. And if you are already, then check your credit reports are recognising this. I recently noticed one of the Credit Reference Agencies were listing me as not on the electoral register, even though I am. And so I had to report the error and get this fixed. It was a bit of a faff, yes, but important to do nonetheless. After the correction was made, my credit score went up.
3. Check for mistakes in your credit reports
As mentioned above, it is entirely possible that things have been recorded incorrectly on your credit report. The problem with this is it may be negatively impacting your credit history so that either it’s preventing you from getting credit or stopping you from accessing the best deals. Or even in Laura’s case, not allowing you to receive a Covid-19 home test.
4. Demonstrate you can handle credit
For many people, their first interaction with their credit history is when they come to apply for a loan or a credit card. They may find that they are rejected, or given unattractive rates, because they’re what’s known in the industry as ‘thin file’ or ‘no file’. This essentially means that they don’t have much of a credit history at all because they’ve never taken out a credit agreement. Lenders see this as high risk as without the evidence they’re unable to judge how good you are at managing credit. They don’t know whether you will pay it back, and on time.
Therefore, one way to build your credit history is by actually taking out some credit agreements, and — this bit is important — making all and any payments on time. You can do this by taking out a credit-building credit card which is designed specifically for that purpose, though beware the incredibly high interest rates. Or you could try Loqbox which helps you build your credit history, while you save for free.
5. Axe old financial associations
When viewing your credit report, if you navigate to the area where it lists your financial associations, you’ll see the people who you have in the past had something like a shared bank account or mortgage with.
If there are any here that are historic, and no longer relevant, then you need to notify the CRAs and ask them to remove the associations. This might be a financial association with an ex partner or an old housemate, but that you no longer have any active accounts or credit agreements with.
These associations, whilst automatically added when you open accounts or take out joint credit agreements, are unfortunately not automatically removed when those accounts are closed. Luckily if you’re using ClearScore, Credit Club or Credit Monitor, it’s easy to make these corrections by using the ‘report errors’ feature within these services. Alternatively you can contact the CRAs directly.
Why remove old connections? Because if any of these individuals has a poor credit history, maybe they’ve overspent on a credit card and missed payments, then it will negatively impact you by association.
6. Pay off outstanding debt
In a perfect world, you’d seek to pay off any outstanding debts ahead of applying for credit. This is because the lenders will be wary of lending more to you if you have already taken on a lot of debt as it may indicate you’re struggling with managing it. If that is the case, for free debt advice check out this page.
7. Maintain a credit utilisation rate of 30% or lower
Your credit utilisation rate is calculated by taking the amount of credit available to you in all forms as listed on your credit report (this can include overdrafts and credit cards) and dividing it by the amount of credit you’re currently using. So if you had a credit limit of £1000 across all accounts, and you’re using £500, then your credit utilisation rate is 50%. According to ClearScore, keeping it under 30% (or even better under 20%) is typically a good strategy.
8. Move home less often if possible
Living at one address for a longer period of time is regarded by lenders as a sign of stability. And so it has a positive impact on your credit score when you move around less.
Building your credit score takes time. For some it’ll take months, for others it can take years. Loqbox makes improving your credit score easy, and helps you learn how to master your money along the way. Whatever your situation, if you’re ready to build a brighter financial future Loqbox can help. Find out more about how it works.