If you are looking to take out a loan, such as a mortgage or secured loan, you might have heard about the importance of your credit score. If your credit score is good, you might not think about it much, but if you have a low credit score, it can seem like a lot of work to build it up. Let’s look at some ways to help you improve your credit score and become eligible for the financing you need for your dream home. 

What is a credit score? 

Your credit score is a reflection of how well you manage your money. It is a three-digit number that helps banks and lenders decide whether or not you are eligible for loans. It can also play a role in your loan affordability, meaning that with a better credit score, you may be able to borrow more money or at a better rate. 

There are three main credit reference agencies in the UK – Experian, Equifax, and TransUnion. Each of these agencies uses a different maximum number for their credit scores: 

  • Experian: 999 
  • Equifax: 700 
  • TransUnion: 710 

This can make it difficult to know what credit score to aim for, but each agency will tell you if your score is good or needs improvement. Checking your credit score is free, and it does not affect your credit rating. 

These companies will also have your credit history, which shows when you applied for loans, as well as any missed payments or other issues.  

Why is building your credit score important? 

Building a good credit score is a good thing and may  help you secure the loans you need. If you have a poor credit score, lenders may refuse to offer you financing. Even if you can get a loan, getting a mortgage with a poor credit score can be harder, and you will usually be offered a higher interest rate. This is to offset the risk that banks face when lending money to people with lower credit scores. There are usually some quick and easy actions to take to help improve your credit score.   

How to build a good credit history 

Now that we know why it’s a good thing  to have a good credit history, let’s look at how to build your credit score or improve it. 

Build up your credit history  

Lenders will usually look at your credit history to see how you manage your money and borrowing over a long period of time. People with a more detailed credit history are able to demonstrate they’re financially responsible and can pay back what they’ve borrowed within the agreed terms. Of course, having a detailed credit history that shows mismanagement can have the opposite effect. 

Try not to miss payments or pay late 

One of the most significant ways to affect your credit score is missing  the repayments for any loans you have. If you make payments on time, your credit score will gradually improve and remain stable. On the other hand, missing payments or making late payments can have an impact on your score. If you are concerned about missing a payment, contact your lender to see if there is any way to take a payment holiday or make another arrangement, which may have a more minor impact. 

Defaulting on payments 

Whilst making late payments or even missing a few payments is likely to impact your credit score, defaulting is worse. This is where you have missed multiple payments, usually over a 3-6 month period, and it can result in the lender registering a default on your credit file for other lenders to see. This usually happens when the lender decides to close the account and cut their losses, so it’s always important to try to discuss payment plans or repayment holidays if you are risking this. Having a direct debit setup to ensure you don’t miss any payments can help avoid this. 

Avoid applying for credit too often  

Applying for credit has a tendency to make your credit rating drop slightly. This can be  a small drop, and will usually return quickly. However, it’s important to avoid making too many credit applications in a short period of time, as this can suggest that you are unable to manage your current finances. This will likely result in one or more of the credit applications being declined. 

Use a small portion of your available credit 

Lenders will often look at what percentage of your credit you are using, which can be reflected in your credit details. Low credit utilisation can suggest that you are financially responsible, making you a more attractive lending option. 

Having too much borrowing  

While low credit utilisation may be a help with improving or maintaining a good credit score, having too much debt, regardless of utilisation, can have the opposite effect. This is particularly the case if you have multiple types of borrowing, including credit cards, store cards, personal loans, car finance and other types of unsecured credit. 

Check your details and voter registration 

Being registered to vote can help ensure that your credit score follows you when you move home, so make sure you are registered. It is also worth checking that the credit agencies have the correct details for you. If your details have become mixed up with someone else’s, it could affect your score. 

Have rental payments reported 

For a lot of first-time buyers, their credit score might not be high because they have no mortgage history. It is sometimes possible to get your rent payments added to your credit history, which can help boost your score even if you don’t have any debts. Talk to your landlord about getting these payments added or look into self-reporting these. 

Be extra careful to avoid scams 

Any scam has the potential to impact your finances, which can cause issues with your credit score. You should also avoid credit repair scams, where companies offer to remove negative credit history for a fee. 

Check your credit score regularly 

Keeping an eye on your credit score will help you see any patterns, as well as see issues the moment they arise. This can help you take the right steps to improve your credit in a timely manner. 

How long does it take to improve your credit score? 

This depends on your personal circumstances. Start by checking your score and what factors are impacting it, as this will show you whether there are some quick fix things you can do to improve your score or whether you need to seek financial advice. Getting advice from a broker is advisable as they may be able to advise you on more significant changes, such as consolidating your existing borrowing into a secured loan to help improve your score and overall financial health.