Hello everyone! In a recent post we looked at the all-importance of your personal credit score and the effect it can have on your finances when it comes to mortgages, credit cards and general “big life decisions”.
That prior post covers how you can check your credit score (often for free) so if you aren’t coming to this post already armed with knowledge of your position – it’s worth checking out that post on Should I and how can I check my credit score?
Unless your score is absolutely sky high (which will be very few of us!) there’s usually scope for improvement. Today I’m going to run through some actions that you can take to improve your credit score, which apply to a wider number of financial profiles.
I’ve classified these by their difficulty levels, so you can grab the simple first, and invest some time if you wish in managing the tougher ones. Every little helps here.
Easy and quick improvements to your Credit Score
Get on the electoral roll
From the perspective of the lender, they want a couple of things. Firstly they want to try and match up your location to what you’re telling them, and secondly they’d like to know if your location is reasonably stable.
This is a matter of security – having certainty about where you are improves the odds you’ll receive any communications on bills and be traceable in event of recoveries being needed. The electoral roll is a very easy way for companies to check this, and so you get brownie points for being on it.
The credit agencies do view you as being in one place for a longer time as a good thing. Despite there being many legitimate reasons to move about frequently (renters spring immediately to mind) from a financial security analysis perspective moving less takes away the chance that the reason you’re moving because you’ve had issues with paying bills. Slightly silly, but an unfortunate fact.
Once done, this one can simply take building time in the same location to maximise it – most of the benefit is felt after an initial year and a half at a single address.
Don’t apply for too many financial products in a six month period
I mean this one falls in the “easy and quick” category because I’m literally telling you not to do something!
When you apply for something like a credit card, it temporarily counts against you – because the conclusion the scorers reach is “why is this person seeking more credit” and see that as a potential danger.
Even 1 actually negatively impacts your score, but the more you apply for the more the effect multiplies. As long as you use the credit responsibly, this will go back to normal in time.
More challenging ways to improve your credit score
Apply for a Credit Card
What? But you just told me applying for financial products hurt my credit score?
So it does hit your credit core short term, but longer term having credit (and here’s the key bit) using it responsibly builds up a history that gives lender confidence – you show you have the ability to successfully manage your debts. If you don’t have any credit (and you trust yourself) it’s worth considering.
I have a guide to different types of credit cards and what might be best for you found here – these walk through a variety of financial situations and gives examples of the type of card you might want to consider depending on what bucket you fall into.
When I talk about using a credit card responsibly, I really mean two things which form the bedrock of the next two tips.
Manage your credit utilisation
Now most people would have guessed the very basic level of this one – that if a lender gives you a credit limit and if you go over that, it’s a bad thing.
However what isn’t so obvious is that actually you should try and use significantly less than your credit limit to maximise your credit score. In fact in an ideal world lenders like to see you use less than 25% of your credit score.
Between 25% and 75% will have a small negative effect, particularly as you get to the higher end. Above 75% and it can start to bite (and don’t even think about over 100%).
There are two ways to do this – keeping your spending between certain levels, and extending your credit limits (see the “improvements to credit limit with some caution” section below for more on that.)
Never miss a payment
I mean I feel this one is quite obvious – if you’ve missed payments in the past this is a clear signal to lenders that you may have issues with handling debt. Now if you’re forced to miss a payment because of a personal situation, that’s one thing – but you should always take the necessary steps to have automatic payments or direct debits set up so you don’t miss one.
Don’t panic too much if you accidentally get a payment reminder – companies usually only take action after a couple of reminders or this has happened before – but make sure you pay that bill right now. If you have doubts or you think there’s a high likelihood of something being considered a missed payment, then call up the company and explain why and that you’re arranging it to be fixed immediately in the hope they grant some mercy.
Keep old credit open
A bit ridiculous but if you have an old bit of credit (even if you only use it very occasionally or don’t use it at all) it can count in your favour as a historical record of having the option to use credit but managing it carefully. So if you’re had some element of credit for a while and it’s not costing you anything to do so, just keep it open.
methods which improve your Credit Score, but should be used with caution
Have a Mortgage
If you’re fortunate enough to be in a position to have your own home, a mortgage that’s been kept fully up to date acts an instant positive sign on credit.
As you’ll have applied and been through a fairly rigorous set of credit checks to get to this point, other lending will see it as you being given the “stamp of approval” and something they can piggyback on.
Obviously, this is a big financial commitment and I’d like to think you’re not just doing it for the credit score!
Extending your credit limit
So this is something that feeds off the credit utilisation piece above, as to have a higher credit limit can ease that “I have lots of credit on offer, but I don’t stretch it” approach that lenders look for.
However, this one needs to be approached with quite a bit of care as trying to overdo this can backfire on you. If you request a credit limit increase are are denied, it’ll put a sign on your credit report that will make lenders thing “ohh, they suddenly needed more money and didn’t get it….is there a problem here”.
So approach with caution. You’ll want to do this where you’ve had a long term relationship with a lender where you have a good history with them and no other blemishes on your credit score. You ideally want to be able to tie it in with some reasoning that you deserve a higher credit limit – for instance that you’ve had a salary increase since your original one was set.
Sometimes, lenders will offer to increase your credit limit of their own accord. If you’re not automatically opted in to allow them to increase it, you should definitely accept – this essentially means you’ve been pre-approved and don’t have to go through an application process. Quite often, card providers will do this when you’ve been with them for some time.
And that’s it!
If you think we’ve missed anything, or you’re having another problem with credit scores you want to know how to fix let us know in the comments below. Getting a good credit score can really help out your long term financial planning, and simply shows good financial health. I’d love to hear how you’re getting on with working on yours.
And if you didn’t check your credit score already, that prior article on what it tells you and how to check it for free is here.