Your credit rating is more important than ever. It will now not only affect your mortgage, what type of credit card you can have, and what loans you’ll be able to receive, but also your mobile phone contracts and car insurance. 

A good credit rating will typically allow you to borrow more money with lower interest rates and receive more options for credit cards, mortgages, insurance and more.

What is a credit rating?

A credit rating is used by organisations to evaluate an individual’s or business’ ability to fulfil financial commitments, such as loans. This is built through a collation of different data, including your credit history.

What causes a bad credit rating?

Bad credit is ultimately caused by failing to stick to a credit agreement. For example, if you make a late payment, miss a payment or pay less than you’re required to, your credit rating will be affected.

It’s important to note that building your credit rating isn’t just for those with poor credit ratings. Having no credit can also limit your options, as lenders won’t have enough data to predict how likely you are to pay credit back. Building your credit rating is an important part of everyone’s financial planning, regardless of circumstances.

How can I build my credit rating?

Building your credit rating can take a long time. For example, if you’re planning to apply for a mortgage, it’s advised to start building your credit rating at least a year in advance – to make sure you maximise your options.

There are various ways you can improve your credit rating over time. These include:

• Registering to vote

The easiest way to increase your credit score is to register to vote. This allows lenders to verify you are who you say you are, increasing your chances of being offered a loan or accepted by a credit card company.

• Cut financial links

Make sure to cut financial ties with previous partners or housemates, for example. Joint bank accounts with people with a bad credit rating can be damaging to your personal credit rating, even if you don’t use the account anymore.

• Credit cards

Using a credit card to build your credit rating can seem counter-intuitive. However, using a credit card responsibly will build good credit history and improve your credit score, as lenders can see that you’re likely to repay them in the future.

Spending a small amount on your credit card and paying it back in full each month is an easy way to build your credit score.

If you already have a poor credit rating, it can be difficult to get a credit card issued. Take the time to conduct a ‘soft search’ to check your eligibility before you apply, as this will prevent rejected applications from affecting your credit score.

• Take out a small form of credit

If you’re unable to get a credit card, a small form of credit, such as a mobile phone contract or utility bill, that is paid on time will show your ability to pay credit back, increasing your credit rating.

• Paying your rent

Paying your rent doesn’t automatically improve your credit score, but there are various schemes that you or your landlord can sign up to that will build your credit score if you pay your rent on time every month.

• Monitoring your credit score

You can monitor your credit score for free using online websites like Experian, Equifax or TransUnion. Checking this annually, or before you make an application, can stop you from being rejected due to a low score, or encourage you to build your credit score, before it’s too late.

• Ignore credit repair companies

These are often expensive, ineffective and sometimes illegal. There are various ways to build your credit without these risky companies, who are unlikely to legally build your credit any faster than you can yourself.

For individual advice on your credit rating, or to discuss the options for improving your credit rating, get in touch with our team or call 0121 285 8528.

 

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