Credit scores

Did you know that some people get better deals on loans than others? It can be because of their credit score.

Lenders use this and other information to decide on how likely they think it is that you will pay back the loan on time. Your credit score, your income and any information held on you by fraud agencies are used by lenders to determine any products they offer you.

You can find your credit score by searching for companies called credit reference agencies.

It is worth checking your credit report with some regularity to make sure that there are no errors. It is also a useful way to guard against fraud.

It’s also important to understand how financial links work. A financial link is created when you take out a joint financial product with someone else.

This could be a joint bank account, a utility bill, a mortgage, a shared credit card or acting as a guarantor for someone’s loan. This is known as a financial association. It means that a link is created in both of your credit reports.

Because of this, their credit history can affect yours, and yours can affect theirs. This link usually remains until the financial connection has ended. For example, the joint account is closed. But, it can stay on your credit file for six years after the account is closed.

It’s important to know that simply living with someone, or being married to them, doesn’t automatically link your credit files.

If you see someone listed on your credit report who you no longer share finances with, you can ask the credit reference agency to remove that link. This process is called disassociation, and it helps ensure your credit report is accurate.

This is commonly done when relationships break down and couples are looking to separate everything money related. A Notice of Disassociation can help those dealing with ex-partners who have a lot of debt, as it can help prevent their credit score being affected as well.

If you are worried about your score, then here are some of the tips on what to look out for and how to improve it.

The number one thing is simple – always pay your bills on time.

Lenders want to know that you are reliable. Missing payments regularly is a big red flag to lenders.

Unfortunately, this can lower your score for up to six years. The good news is that paying on time now will help rebuild your score over time.

Secondly, make sure you are on the electoral register.

Lenders use this to confirm your address. Being registered to vote at your home address tells financial services companies that you are who you say you are.

Lenders also like to see that you have long-term accounts so they can see how well you manage them, as well as knowing you’ll remain a customer for a long time.

For reservists and veterans, this is usually straightforward. You can register like any other civilian if you are living in the UK. For those currently serving and posted frequently, especially overseas, registration can feel less obvious, but it is still possible. Service personnel and their spouses or civil partners, can register from an overseas posting via gov.uk.

Your registration lasts up to five years, and you will receive a reminder when it needs renewing. Keeping your details updated whenever you move, helps maintain a clear address history. This can support future credit applications.

This is particularly helpful if you use a British Forces Post Office – or BFPO – address. This is because lenders’ systems don’t always recognise these addresses in the same way as civilian ones.

Lenders like to see a credit history, i.e. that you have borrowed successfully in the past. If you’ve never had any debt at all, some lenders are wary.

Some lenders like to see that you have handled a mix of credit. For example, a credit card and a loan. This shows you can manage different types of repayment.

If you have little to no credit history or a poor credit score, you can use credit builder cards to help you establish or improve your credit score over time. Because they are aimed at those with weaker credit histories, credit builder cards usually come with lower credit limits and higher interest rates.

Credit builder cards are basic cards aimed at those who are new to borrowing. If you use one for everyday spending and, provided you repay in full each month, your credit score could improve within about six months.

So, if you’re saving for a house deposit or considering a large purchase, a credit builder card could help to make your mortgage or loan application look more appealing to lenders.

By using them for your daily spending, making regular purchases and paying off your balance on time, you can gradually boost your credit score.

Don’t forget that taking out a phone contract, without paying upfront for the handset, is a form of credit.

A soft credit check is an initial look at certain information on your credit report. Companies perform soft searches to decide how successful your application would be, without conducting a full examination of your credit history.

Soft searches have no impact on your credit score or any credit applications you might make in the future. It doesn’t matter how many there are.

A Notice of Correction is a short statement you can use to add further information to an entry on your credit report. You could use it to explain why you fell behind with the repayments on a loan or credit agreement. Any lender checking your credit report will see your statement and should take it into account.

If you’ve been applying for credit, lenders will do what’s called a hard search. This is a formal credit check. Hard searches are fine individually, but several of them in a short period can reduce your credit score.

Finally, it helps to not max out all of the credit available to you. Keeping below 30% of the amount you can borrow shows you are not relying on it.

Lenders also want to know that they will profit from you. So, although it’s counter-intuitive, in some cases, always repaying debts early can work against you too.

Knowing your credit score and finding ways to improve it will help you if you ever need to borrow money. As you explore borrowing options, remember that your ability to repay your debt consistently and punctually can impact your credit score.

Lenders use a credit score to judge financial reliability. It’s a number that provides a quick summary of your credit history. It comes from the credit reports held by the three credit reference agencies – Equifax, Experian and TransUnion.

They all hold information on you that lenders can use, and they score slightly differently. On top of this, lenders will factor information such as income and outgoings to inform their decision. You provide this information when applying for a product.

Your credit score affects your ability to borrow money at a later date. The higher your score, the better deals you can get for financial products, such as a loan or mortgage.

Missing payments or spending beyond your credit limit can damage your credit score. Making late payments or missing payments entirely could impact your ability to take out a mortgage to buy a house in the future.

Missing three consecutive payments will damage your credit score. This is called a serious or sustained delinquency. Lenders usually then classify the loan as in default.

Six missed payments often triggers a formal account default, meaning the relationship between debtor and creditor has broken down. This can remain on your report for up to six years.

If you get a County Court Judgement (CCJ), it will damage your credit score. However, if you pay within a month, you can get the judgement removed from the register. If you pay after one month, you can get the record of the judgement marked as ‘satisfied’ in the register.

So it’s important to be aware of the deadlines and amounts of debt payments to keep your credit rating strong.

Late or missed payments usually stay on your credit report for six years. But, if you think something has been reported incorrectly, you can raise a dispute with the credit reference agency. And if there were extenuating circumstances – for example, a medical emergency – some lenders may be willing to review your situation and take your circumstances into account.

Lenders will usually log late payments internally, which may affect your future relationship with them. However, they usually give you 30 days before they report late payments to credit bureaus. That means making a late payment may not affect your credit score, although you may incur late payment fees.

Taking a few simple steps can help protect your credit score. Checking your credit report frequently, staying on the electoral roll, making payments on time and keeping balances low can all help keep your score strong. For guidance on staying on top of repayments, see our video on managing repayments.