Whether you’re applying for a loan or credit card, renting a property or getting a mortgage, your credit score plays a significant role in deciding your financial credibility. People with good credit scores have access to more borrowing options and better interest rates, while those with bad credit find their options are limited.
A bad credit score can be disheartening, but there are things you can do to improve it. In this guide, we’ll reveal some practical tips and strategies to help you on your journey.
Understanding credit scores
Before diving into the strategies to improve your credit score, we need to understand how they work and why a good report is essential.
Credit scores are numerical representations of your creditworthiness, ranging from 0 to 1000 (depending on the credit reference agency). High scores give you access to a wider range of products, while lower scores often mean fewer options.
When deciding your credit score, agencies look at a range of factors, including:
Payment history
Your payment history makes a huge dent in your credit report, and many people find their score decreases if they miss a credit card or loan payment.
Credit utilisation
Most financial authorities recommend people use no more than 30% of their total available credit because it ensures they’re not spending too much. Maxing out credit cards or putting things on your card each month can damage your score.
Credit history length
Individuals with long credit histories usually have higher scores because lenders can see you’re a responsible borrower. However, if you have any late payments or unpaid debt, the decision can go against you.
New credit applications
When you apply for new credit, the lender performs a soft or hard credit check. Soft credit checks usually have little impact on your file, but hard credit checks usually decrease your score temporarily.
What counts as a good credit score?
You’ll probably use Equifax, Transunion or Experian when checking your credit score. All three credit reference agencies (CRAs) are reputable sources to evaluate your credit report, and each has a points-based system.
Here’s what each CRA considers to be a good credit score:
- Equifax: 531
- Transunion: 604
- Experian: 881
According to Finder, people under 25 usually have the lowest credit scores, while those over 65 have the highest average score.
Why you should focus on strengthening your credit report
A bad credit score can make improving your financial options and getting a mortgage challenging. Luckily, there are things you can do to fix any issues with your report. But first, it’s essential to consider why you should address a poor score.
Loan approval and favourable terms
Lenders always look at your credit score before deciding whether to offer a credit card, loan or mortgage. The main reason for this is to evaluate risks and ensure applicants can pay the money back.
While a bad credit score doesn’t necessarily mean you won’t get a loan or credit card, most lenders increase their interest rates.
Access to better financial products
A favourable credit score provides access to a broader range of financial products and services. Lenders, insurance providers, and landlords often consider credit history when assessing eligibility.
You’re more likely to qualify for desirable credit cards, low-interest rates, competitive loan offers, and rental agreements.
Employment prospects
Some employers – especially in roles that involve financial responsibility or handling sensitive information – may conduct credit checks as part of the hiring process. A good credit score can enhance your employability, as it demonstrates financial responsibility and trustworthiness.
Rental opportunities
Landlords and letting agencies often review credit scores when considering rental applications. The agency might request a guarantor for additional security if you don’t have a strong credit report. Tenants considered a risky option might also have to pay a higher deposit.
Financial flexibility and future planning
A good credit score provides financial flexibility and allows you to plan for the future. Whether you want to start a business, pursue higher education, or buy a home, a positive credit history allows you to obtain the necessary funding or financial resources.
How to improve your credit score with these top tips
Maintaining a good credit score requires responsible credit management, timely payments, low credit utilisation, and using credit wisely. Regularly monitoring your credit report and addressing any inaccuracies or issues is crucial in maintaining a positive credit score.
It might sound challenging, but following these tips will help you evaluate your score and make changes that will improve it.
Review your credit reports
Obtain credit reports from the major credit reference agencies to begin your credit improvement journey. Popular options include Credit Karma and ClearScore, which offer a free report with tips.
Review the reports carefully to identify errors, incorrect information, or fraudulent activities. Dispute any inaccuracies promptly to ensure your credit report reflects accurate information.
For example, you might need to update your address and add additional credit cards or store cards. If your file has any suspicious activity, you should immediately check with your bank or credit card provider and report it if necessary.
Pay your bills
When those bills start piling up, it’s easy to bury your head in the sand—but payment history determines your credit score. Late or missed payments can significantly decrease your score and land you in legal trouble, so make sure you pay your bills on time.
Some people find it easier to set up direct debits so they don’t have to worry about keeping up with their repayments.
If you’re having financial difficulties, speak to the people you owe money to and work out a lower payment plan. Lenders want to recover their money, and most prefer a smaller monthly payment to nothing.
Reduce your credit card debt
High credit card balances can harm your credit score, but it’s so easy to get into a constant cycle of debt. According to Forbes, the average person in the UK has around £1,174 of credit card debt, and 98% of people aged 35 to 44 have between one and four credit cards.
With interest rates rising, the best way to improve your credit score is by paying off the cards and prioritising them before anything else.
Making the monthly minimum payment means you’ll continue accumulating interest and struggle to pay off the total balance. Instead, you should use one of the following methods to reduce your debt and pay the card off quickly:
Snowball Method
This method involves paying off your smallest debts first, then moving on to higher balances. People like this technique because it allows them to make a noticeable dent in their debt which can be encouraging.
Avalanche Method
The avalanche method is best if you want to make a significant dent in your credit card debt. With this technique, you pay off cards with the highest interest rates first, then move on to the next one, which helps you save money and improve your credit score.
Keep credit utilisation low
Credit utilisation refers to the percentage of your available credit currently in use. As we mentioned, the more credit you use, the worse your score will be. For example, if your credit limits add up to £10,000 and you’re using £5,000 of that amount, you should try to reduce it.
Aiming to reduce that amount to £3,000 will make a significant difference. However, ideally, you should use as little as possible or pay back what you put on the card each month.
Don’t make multiple credit applications
Each time you apply for new credit, it generates a hard inquiry on your credit report, which can temporarily lower your credit score. You can avoid this by only making credit applications if it’s absolutely necessary because this will build your score.
Most credit reference websites will review your credit accounts and tell you when to avoid new applications. If you keep applying for loans and credit cards, rejections can result in a poor credit score, so focus on paying off the credit you already have.
Don’t forget about rent payments
If you rent from a housing association or large letting agency, your payment history will probably show on your credit file. Some private landlords also use the Rental Exchange scheme to show you’re paying rent on time, and a good record can help your credit rating.
Use secured credit cards
If you’re struggling to qualify for traditional unsecured credit cards, consider applying for a secured credit card. Secured credit cards are less common than traditional cards because they require a security deposit.
However, these cards let you show you’re a responsible borrower, and they can boost your credit rating over time. Once credit card companies see you can manage repayments, you’re more likely to get access to unsecured cards with a better credit limit.
Seek professional help
Remember, you don’t need to struggle alone with your credit score. Credit counselling agencies, financial advisors and debt charities can give you much-needed advice.
Some will help you create a debt repayment plan and improve your financial habits.
Get a credit builder loan
If you want to improve your credit record, these loans can help you prove financial responsibility and increase your score. They’re usually only for small amounts, but the loans boost your future credit eligibility.
Each payment you make goes to the main credit reference agencies, so it will show on your report and help you access better deals in the future.
Some people also prefer to build credit with secured lending or guarantor loans. Whatever route you decide, these loans go a long way to eliminating the long-term effects of poor credit history.
The bottom line
Even if you have a low credit score, there are still ways to improve it and enjoy more financial freedom in the future. The key to managing credit successfully is knowing what you’re getting into when you sign for the card or loan and ensuring you can manage it responsibly.
If you need to build your credit score, Believe Money is here to review your options. We specialise in working with people from all backgrounds and help our clients find the right borrowing solutions for their needs.
With a dedicated team of brokers specialising in sourcing loans for individuals with a low score or limited credit history, we’ll help you get on track again.
FAQs
Who can benefit from a credit builder loan?
Credit builders benefit individuals with limited credit history, no credit history, or poor credit scores. It can be handy for young adults or people recovering from financial setbacks.
Are there any downsides to credit-building loans?
The loans have potential downsides, including higher interest rates or fees than traditional loans. Late payments or defaulting on the loan can negatively affect your credit.
How long does it take to build credit with a credit builder?
The time it takes to build credit with a credit builder can vary depending on individual circumstances and the specific credit builder program. It usually takes several months to a year to see noticeable improvements in your credit score.
Which is the best credit reference agency to monitor my score with?
Credit Karma offers an excellent free service, but ClearScore and Experian credit scores are also good options. Ultimately it depends on your needs and whether you want to pay for premium credit checks.