Making sure you have a good credit score is extremely important when it comes to getting the best deals on car finance. However, you’re far from being alone if you don’t fully understand what your credit score is, what affects your credit score and how you can improve your credit score.
In fact, the process of lending money can often seem shrouded in mystery, so it’s no wonder many people feel nervous when applying for new credit.
We don’t believe that lending should leave people confused, so aim to demystify some of the facts about your credit score as well as providing simple steps which will help improve your credit rating.
To begin, we will be exploring what a credit check is and what things can affect your score as well as covering some of our most frequently asked questions relating to credit. So if you’re already pretty savvy, you might want to scroll down to jump straight to the simple steps you can take to improve your rating, covered in our handy infographic.
What is a credit check?
A credit check (also known as a credit search) is when a company looks at your credit report to assess your ability to afford credit. Your credit report is a file that records your history managing and repaying debt. When a company carries out a credit check, they will look at how much outstanding debt you have, whether you make payments on time, how you are managing your debt and whether you are financially linked to anybody else.
There are two main types of credit check, and it’s essential to understand the difference between the two:
A soft credit check is when a company looks at basic information on your credit report to offer an initial assessment of your likelihood to get credit with them. A soft credit check is not visible to other companies and has no impact on your credit score, so can be a useful tool for you to use to check your eligibility for credit before actually completing a full application.
A hard credit check is when a company makes a complete search of your credit report. Every hard check search shows on your credit report and lots of hard credit checks can harm your overall credit score as they make you appear more desperate for money.
You should be aware that a company does not always need your permission to carry out a credit check, but must always have a legitimate reason for carrying it out e.g. you have applied for a loan with them.
What affects credit score?
Lots of things can affect your credit score including;
- How much credit you have
- How long you have had credit for – never having any debt means you are a greater risk, as lenders have no history of you paying and managing debt
- How much you owe and how much of your available credit you are using known as your credit utilisation rate
- Your payment history – whether you have any missed payments
- Whether you are registered on the electoral roll
- How often you have applied for credit – lots of applications for credit in a short space of time can make you look desperate for a loan and this can have a negative impact
- The affordability of what you are asking for, taking into account what you earn and what you owe
- Being refused credit in the past
How to improve credit score?
While the list of factors which can affect your credit score above may seem daunting, the flip side is there are lots of things you can do to improve your credit score.
One of the first things you should do is check your credit report and make sure that the information held is accurate. If you notice any discrepancies, open credit that you no longer use or financial ties that are no longer valid, you should take appropriate action to get the information updated.
You should also check to make sure you are registered on the electoral roll, and if you aren’t, you should aim to do so as soon as possible.
Sometimes it is out of your control, but where possible you should try and show stability in your life by not frequently moving jobs or homes. Lenders are more likely to look favourably at borrowers who can prove they have a regular income and a stable home.
What if I have debts?
When it comes to any current debts, you should aim to manage them well making payments on time. With credit cards, you should try to pay more than the minimum amount monthly and if possible aim to keep your credit utilisation rate low. Sometimes it can work in your favour to spread credit card debt over a few cards to reduce your utilisation rate.
If you are looking to take new credit out, make sure you use soft credit checks to get an assessment of your eligibility before you apply. This way you won’t need to make lots of applications within a short space of time which can make you seem like you aren’t managing your finances well. Be realistic too, don’t apply if you know that your finances don’t add up, wait until you are in a better position and then proceed with an application.
Avoid taking out a payday loan at all costs. Not only will you get charged an extortionate amount of interest on this kind of loan, but they can severely impact your credit score as they make you look less reliable and not in control of your finances.
Don’t forget that debt can be a positive thing as if you have no lending history whatsoever, you can appear riskier to lenders, the key is demonstrating that you can manage your debts. In this case, the best place to start building your credit score up is by applying for a credit card but only using it for routine expenses like fuel and paying it off in full every month.
What is a good credit score?
The truth is there is no set credit score which is classed as good because the UK’s three main credit referencing agencies (CRAs) score consumers differently.
For general reference though, with Experian, a good score starts at 700, Equifax class a good score as 660 or above and finally Noddle’s best indicator is a 3+ on its 1-5 rating.
How can I raise my credit score in 30 days?
Improving your credit score can take time, but if you are looking to raise your credit score in a short period, the below steps may result in a quick boost:
- Correct any errors on your report – focus your attention on creditors who may be inaccurately showing you as having late or missed payments. It’s a good idea to phone and write to creditors to make them aware of the issue to spur them into action.
- Negotiate with your creditors – if you have got into default with your payments, you can contact the lender and see if they will accept a partial payment to clear the debt and reclassify it as paid on your report.
- Raise your available credit – while this may seem counter-intuitive by increasing your available credit, you can decrease your utilisation rate quickly, which can make you appear in a better position. This method can work well on credit card debt, so if possible, spread your debt evenly between cards rather than having one card maxed out.
Is it better to cancel unused credit cards or keep them?
We’ve already mentioned about credit utilisation rate and how spreading your debt over several cards can sometimes be better than having one credit card with all the debt, but what about credit cards you’re no longer using?
Generally, it is best to leave unused credit open. Doing so enables you to benefit from a longer average credit history and more available credit. This strategy plays into credit scoring models which reward you for having long-standing credit and low rates of utilisation and is particularly beneficial if you plan to apply for a big loan soon such as a mortgage or a car loan.
However, there are certain circumstances when it is best to close the account. For example, closing an unused credit card may be for the best if it is a relatively new line of credit, if you are worried about being tempted to spend on it or if you are paying an annual fee on the card.
How to build credit?
So if you’ve never had any debt, how do you go about building your credit score? One of the best ways to start building your credit history is by applying for a credit card. You needn’t worry about the credit card limit at this stage as you are aiming to build up a history of good debt management.
The best way to do this is to use the credit card to pay for something you would spend money on regularly, for example, fuel for your car or your weekly groceries. You should then pay the card off in full at the end of every month.
Getting a credit card is a good way to build up your credit quickly. However, you need to be careful that you only use the credit card for items you would usually purchases.
You also need to make sure you pay your bill on time each month. Fortunately, many lenders will give you the option of setting up a monthly direct debit to pay your card off in full, which can be helpful if you are likely to forget to make the payment otherwise.
Road to good credit infographic
The below infographic demonstrates some simple steps you can take to boost your credit rating and is a great place to start if you are looking to build or improve your credit rating.
Safely & quickly check your eligibility for car finance
Free soft search finance checker – find out today
No deposit required
An affordable solution
Fast and easy process
Check with confidence
Will not affect your credit rating