Credit scores are very important when it comes to getting loans and applying for car finance. While we at Car Finance Plus are experts in helping those with bad credit scores secure car finance, a higher credit score will increase your chances of being successful. As such, we’ve compiled this handy guide on how to improve your credit score.
It’s important to note that there is no “quick fix” for improving credit scores; credit scores reflect a lifetime of credit-related activity and that cannot be altered overnight. That being said, there are steps you can take immediately which will contribute to a better credit score.
Registering for the electoral roll is a simple but effective way of improving your credit score. Lenders will check the electoral roll to help verify your identity and living status, and being on the electoral roll will improve the way you are viewed by prospective lenders. An active citizen is often seen as a more reliable borrower than a person who doesn’t vote. Joining the electoral roll in the UK is easy and can be done online.
Your credit report contains information about your past and present finances, such as outstanding loans, previous credit inquiries, whether you’re on the electoral roll, and your address. If there is a mistake on your credit report, it could have an unfairly negative impact on your credit profile. Simply contact one of the UK’s credit check agencies, such as Equifax or Experian, and they’ll send you a copy of your credit report.
Each time you apply for any form of credit, lenders will perform a full credit check to test your eligibility for a loan. Whenever you receive a credit check, it is recorded in your credit report, as is whether you were successful or unsuccessful in your inquiry. Unsuccessful credit applications are bad for your credit score and make you a less attractive credit option for lenders in the future. The fact that you have previously been rejected by a lender will make other companies wary of your profile.
To minimise the number of unsuccessful credit applications, use services which perform a “soft search” of your credit report. A soft search is a brief overview of your credit report that will indicate how likely you are to be accepted for a loan. Soft searches do not appear on your credit report and can help you decide whether you should actually be submitting an application or not. In this way, you can avoid applying for a line of credit that is likely to be rejected.
Fill in our simple online application form and we can perform a soft search for you, free of charge!
If you have numerous credit cards and debt outstanding, it’s a good idea to pay them off as quickly as possible. While having some form of credit can be good for your credit score (as we’ll discuss below), having multiple outstanding forms of credit could be a red flag to potential lenders. People sometimes fall into the trap of taking out a loan to pay off another loan, and this behaviour is seen as somewhat irresponsible.
When cancelling credit cards, it’s important to ensure they are fully paid off before doing so. Failing to do so could reflect badly on your credit score.
As we’ve said, credit scores are long-term overviews of your credit history, and changing them can take time. Overall, practising good money management over time is the best way to improve your credit score. Here are some long-term actions you can take.
Multiple credit applications in a short space of time can negatively affect your credit score. This is because it suggests you’re in a situation where you need money quickly, potentially regardless of the cost. Lenders don’t look favourably on this kind of behaviour since it can be an indicator of poor money management. It is therefore advisable to reduce the number of credit applications that you make. Even if you are in need of a line of credit, you should ensure that you choose lenders that are likely to approve your application and reduce the total amount of applications that you make.
Having multiple recent addresses and not being ‘rooted’ in one place for very long is a red flag for lenders. A person with a long-term address is seen as more responsible and far less of a credit risk. Therefore, if possible, try to keep the same address for at least a year before moving on. The ultimate aim when applying for credit is to make lenders as comfortable and confident in you as possible. A person with no long-term address does not provide this confidence.
This may seem obvious, but it’s vitally important. Your track record of meeting payments – including mortgages and rent, utility bills, phone bills, council tax, and more – is concrete evidence of your ability to meet payments. The better your track record, the more likely you are to continue to meet payments in the future – and this is what lenders want to see. A long history of making payments on time is a sure-fire way to improve your credit score.
We previously mentioned that having some form of credit, such as a credit card, can be beneficial to your credit score. This is because it acts as evidence of your ability to manage your finances and deal with lenders appropriately. One thing that negatively affects a person’s credit score is if they have no history of managing credit or meeting repayments. As such, using a credit card can actually bolster your credit score by actively building up a credit profile for yourself.
It’s important to be responsible with your purchases however, otherwise the opposite will happen and you’ll worsen your credit score. Use it for manageable purchases and don’t overextend yourself. You want to prove your financial responsibility, so stay within your credit limit each month. Steadily build up a profile of responsible loan repayments and your credit score will improve.
In a similar vein to the previous point, keeping your credit utilisation ratio low shows financial maturity. Your credit utilisation ratio is the amount of credit you’re actually using as a percentage of the total credit you have available. For example, if you have a credit card which allows you to spend up to £3000 but you only use £600, then your credit utilisation ratio is 20%.
Using less credit than you have available suggests you are using it for only what you need, instead of being frivolous. This is looked upon favourably by lenders and will reflect positively on your credit report. A utilisation ratio somewhere around 20-30% or lower is ideal.
This is an overarching long-term strategy. Aside from the actions discussed above, such as meeting repayments and demonstrating good money management, establishing good personal finance practices will help you in the long run. This consists of things you do ‘behind the scenes’ that won’t be featured on a credit report or be seen by lenders.
For instance, we advise being organised with your finances – having a dedicated folder or drawer for all of your bills, credit card statements, payslips and the like will make money management far easier. It’s also a good idea to hold on to this paperwork, even after the bills have been paid or the payslips have been processed; it’s better to have it and not need it than need it and not have it.
It’s also advisable to dedicate a set amount of time each month or each week to go through your finances and ensure that bills are being paid on time, your purchases via credit are within your budget, and your upcoming loan payments are scheduled and accounted for. Up-to-date knowledge of your finances is essential for good money management. While this won’t directly contribute to an improved credit score, it sets you up to be able to perform the actions we’ve advised in this article.
So there you have it, ten ways that you can improve your credit score. We’ll reiterate that you probably won’t see changes immediately, but following our guide will ensure your credit score increases over the coming weeks and months. For more information on credit scores, check out our related blog post. Alternatively, get in touch with us to discuss your car finance options, regardless of your credit score.View more from The Car Finance Hub