How to build a credit score

What is a credit score?

A credit score is a figure used by lenders to decide if you’re a high or low risk when it comes to borrowing. It could also give you an idea of how likely you are to be accepted for credit.

It’s also worth noting that while having a bad credit score works against you, so can having no credit score at all. This is because it’s harder for lenders to work out if they want to offer you credit if you don’t have any credit history.

Your credit score is based on your credit report, which is a summary of how you’ve managed credit in the past. To be clear, credit means borrowing money under the agreement you’ll pay it back later.

What are the benefits of improving my credit rating?

A good credit rating could help improve your chances of successfully applying for credit in the future. A higher score shows lenders that you’re able to manage your finances sensibly and could make repayments on time.

Benefits of a good credit rating:

• It could unlock lower rates of interest, which could make borrowing cheaper.

• You might be able to get a higher credit limit and borrow larger amounts. This could be particularly useful when applying for a mortgage.

• You may gain access to promotional offers, and a wider range of offers and lenders.

• It can help you get accepted for a variety of credit products beyond mortgages, credit cards, and loans. For example, mobile phone contracts and car insurance.

How to improve your credit score

There are numerous steps you can take to build and improve your credit score:

1. Always pay on time

If you meet all repayments and repay outstanding debts on time, your score is likely to improve. But the opposite is true if you miss payments.

A missed or late payment could remain on your credit file for up to six years.

Avoid late payments by setting up a direct debit for ALL bills, where possible.

2. Keep your credit utilisation low

Your credit utilisation is the percentage of your credit limit you use. For example, if you have a credit limit of £1,000 and use £500, your credit utilisation is 50%.

Lenders see a low utilisation percentage as a big plus - it can also increase your credit score.

3. Check your credit report for any mistakes

Before you apply for credit, check that your credit report is accurate and up to date. If you’ve moved over the past few years, make sure the registered address is your current one.

A regular check of your credit report could also uncover any fraudulent activity that you weren’t aware of, helping protect your credit score. If you see any suspicious activity, raise this immediately with your lender or the big three credit reference agencies - Experian, Equifax and TransUnion.

Examples of fraudulent activity on your report include:

• A surge in the amount you owe

• An application you didn’t make

• Being linked to an address you don’t recognise

• An increase in hard searches you don’t recognise

4. Get on the electoral roll

Register to vote. It’s quick to do, even if you live in shared accommodation. Credit providers use information from the electoral roll to confirm your details are correct and it’s a key element in building your credit history.

You can register to vote at any time on the GOV.UK website.

Not eligible to vote in the UK – so can’t be registered for the electoral roll – but can give proof of residency? You can ask credit reference agencies to add a ‘notice of correction’ to your credit file. This may help you get credit if you’re a foreign national and can evidence to lenders you have a fixed long-term UK address.

5. Only borrow what you can afford to pay back

Getting into deep debt is never a good thing. Struggling to make repayments could eventually lead to a County Court Judgment (CCJ), Individual Voluntary Agreement (IVA) or even bankruptcy.

These can stay on your credit file for up to six years and could have a huge impact on your credit score for years to come. So only borrow what you can afford to pay back.

At the very least, make sure you’re able to pay the minimum monthly repayments.

6. Make sure your name is on some of the bills

If you share a home, make sure your name is on one or more of the utility bills; for example, gas, electricity or water. Utility bills in your name can help boost your credit score if you pay them on time. If you’re contributing to the household bills each month but they’re in someone else’s name, only they will benefit.

7. Diversify your credit mix

Having a variety of credit types, such as credit cards, instalment loans, and retail accounts, can improve your credit score. Lenders like to see that you can manage different types of credit responsibly.

But it’s important to note that you shouldn’t take on more credit unless you really need it. Only take on new credit if you can manage it well.

8. Think about applying for a credit-building credit card

If you have a bad credit history, or little history at all, you might want to think about applying for a credit-building credit card. If you’re accepted, you may be able to improve your score and potentially unlock better deals in the future.

It will give you the chance to prove that you’re able to make all your repayments on time. It also allows you to demonstrate that you can manage a credit card balance or other lines of credit.

How to maintain a good credit score

Once you’ve improved your credit score, it’s important to maintain it. Here are some tips to help you keep your credit score healthy:

1. Keep old accounts open

Closing old credit accounts can reduce the average age of your credit history, which can negatively impact your credit score. If you have old accounts that are in good standing, it’s often better to keep them open. This shows lenders that you have a long history of managing credit responsibly.

2. Use a soft search eligibility checker

A hard search will be marked on your credit report every time you make a credit application. If you’re rejected or make too many applications, it could damage your credit score.

Before you apply for a credit card, use a soft search eligibility checker to find out how likely you are to be accepted.

A soft search of your credit report can only be seen by you, not the lender. It won’t affect your credit score in any way.

3. Don’t keep applying

If your application has been rejected, don’t keep applying elsewhere. Every time you apply for credit, it leaves a footprint on your credit file. Too many applications over a short period of time makes it look like you’re struggling financially and are desperate for money. It could make lenders think you’re a credit risk.

4. Think about your partner’s credit history

Applying for a joint bank account, mortgage or loan with someone else financially links you together. If your partner has a poor credit history, it could affect your own chances of getting credit in the future. If this is the case, it’s best to keep your finances separate.

Having separate finances could also make things easier if you split up. If you have joint finances and decide to call it a day, you’ll need to contact the credit reference agencies. Ask them for a letter of disassociation – this will stop your ex’s credit history affecting yours in the future.

When it comes to asking for a notice of disassociation, keep in mind that:

• You’ll need to close any joint bank accounts or pay off any joint loans before you can ask for one.

• Each credit reference agency will need to be contacted individually – updating one doesn’t automatically update them all.

• You’ll have to be ready to give proof that your financial connection with your ex has come to an end.

5. Avoid using your credit card to withdraw cash

Using a credit card to withdraw cash from an ATM can be very expensive. You’ll be hit with high fees and interest, especially if you take out money using your credit card abroad.

It could also be a red flag for lenders who may think you’re having trouble managing your finances.

6. Try to avoid regularly moving home

Sometimes moving can’t be helped, but lenders like stability. They could see moving home regularly as a sign that something’s wrong, for instance, issues with paying rent.

7. Use credit monitoring services

Think about signing up for a credit monitoring service. These services can alert you to any changes in your credit report, helping you to quickly address any issues that may come up. They can also offer tips and insights on how to improve your credit score.

How long does it take to build my credit score?

If you were hoping to increase your credit score quickly, keep in mind that it can take several months for your score to improve. That’s because it takes time for credit agencies to make sure they have the most relevant information about how you’re using credit.

Just be aware that opening a new current account or getting a credit card could lower your score for a while.

How to check your credit history

You can check your credit score by using a credit reference agency (CRA).

The three leading UK CRAs are Experian, Equifax and TransUnion.

Each agency offers:

• Free access to your statutory credit report – this gives you a basic snapshot of your credit history but doesn’t include your credit score.

• Experian and Equifax offer a free 30-day trial, which gives you access to your full credit report and your credit score. After that, you’ll need to pay a monthly fee.

Be aware that the three agencies have slightly different credit score ratings. A figure could be a good credit score with one credit reference agency but an average or even relatively bad credit score with another.

See those scores as indications of your credit record, given there’s no such thing in the UK as one universal score. Ultimately, the only party that matters 100% is how the lender you next apply to views you, and each lender has slightly different criteria to the next.

What can lower your credit score?

There are several things that can lower your credit score:

• Late or missed payments – these will be marked on your credit report, almost certainly lowering your credit score.

• Making too many applications for credit in a short time – if you’ve been refused credit, don’t immediately start applying to every other credit card provider. Applications for credit will be marked on your credit report, so many applications in quick succession could negatively affect your credit score.

• Getting a new credit card and never using it or using it too much – doing this could also negatively affect your credit score.

• A history of large debt or bankruptcy – having a difficult past as a borrower can have a long-lasting effect on your credit score. If this fits your situation, you’ll need to slowly rebuild your credit score over time. Unfortunately, there are no quick fixes.

How can a bad credit score affect me?

A bad credit score can have a significant impact on your personal finances. Here are some ways a poor credit score could affect you:

1. Difficulty getting approved for loans and credit cards

Lenders use your credit score to assess the risk of lending to you. A low credit score can make it difficult to get approved for loans, credit cards, and other forms of credit.

2. Higher interest rates

If you have a bad credit score, lenders may see you as a higher risk and charge you higher interest rates on loans and credit cards. This means you'll end up paying more in interest over time.

3. Difficulty renting or buying home

Landlords often check the credit scores of potential tenants to assess their reliability in paying rent on time. A low credit score can make it challenging to secure a rental property.

If you’re hoping to buy, a bad credit score may make it more difficult for you to be approved for a mortgage. If you’re approved, you’ll likely be charged a higher interest rate.

How does a credit check work?

A credit check is where a lender or service provider reviews your credit report to decide your creditworthiness.

First, there are two types of credit checks: hard and soft.

A hard credit check:

• Happens when a lender reviews your credit report as part of a credit application.

• Leaves a mark on your credit report that other lenders can see and may slightly lower your credit score – but this is usually temporary.

• Is a signal to lenders that you need to borrow, making you higher risk. If you quickly prove you can manage your new credit well, your score will soon bounce back.

A soft credit check:

• Is carried out for non-lending purposes. This could be for a background check or pre-approval for a credit offer.

• Doesn't affect your credit score.

• Isn't visible to other lenders.

Here's how a hard credit check works:

1. Asking for your credit report

When you apply for credit, the lender will ask for your credit report from one or more of the credit reference agencies (CRAs) such as Experian, Equifax, or TransUnion.

2. Reviewing your credit history and credit score

The lender will review your credit report to see how you've managed credit in the past. They'll look at things such as:

• Payment history – have you made your payments on time?

• Credit utilisation – how much of your available credit are you using?

• Length of credit history – how long have you been using credit?

• Types of credit – do you have a mix of credit accounts, such as credit cards, loans, and mortgages?

• Recent credit inquiries – have you applied for a lot of new credit recently?

Your credit score is a representation of your creditworthiness, based on the above information. Each CRA has its own scoring system, but generally, a higher score indicates lower risk to lenders.

3. Making a decision

After reviewing your credit report and credit score, the lender will decide whether to approve your application and what terms to offer:

• If you have a high credit score, you're more likely to be approved for better terms, such as lower interest rates.

• If your score is low, you may be denied or offered less favourable terms.

Products that need a credit check

When you apply for certain financial products and services, a credit check is typically needed. Here are some common products that need a credit check:

• Loans – whether it's a personal loan or car loan lenders will perform a credit check to assess your ability to repay the borrowed amount.

• Credit cards – credit card issuers check your credit report to decide your creditworthiness.

• Mortgages – when applying for a mortgage, lenders will carry out a thorough credit check to judge your financial stability. They're also checking your ability to make your monthly repayments on the likely significant mortgage balance.

• Rental agreements – landlords and letting agents often run credit checks to assess the reliability of potential tenants.

• Mobile phone contracts – mobile phone providers often carry out a credit check before approving a contract. This helps them assess the risk of non-payment.

• Insurance policies – if you choose to pay for your car or home insurance in monthly instalments, the insurer will likely run a credit check. This is because spreading the cost over several months is seen as a form of credit.

• Utility services – utility companies may carry out a credit check before setting up an account. This is to make sure you can make regular payments.

I don’t even have a credit history, so why do I have a low credit score?

It may seem unfair that you’re given a low credit rating just because you haven’t borrowed before. But lenders base the risk of lending money to you on your repayment history and debt management.

If you’ve never had a credit card, loan, mortgage or overdraft, they have no evidence of your ability to pay back what you owe.

What is new credit and how will it impact your credit score?

New credit is exactly that – a new line of credit you’ve opened. This could be a new credit card, loan or mortgage.

Once you’ve opened that new credit, you might see a slight change to your credit score. This could be an increase or decrease, but it shouldn’t be too significant.

If you continue to meet your repayments and keep on top of your credit, your credit score should improve. This is because you’re proving that you can manage your money well as a borrower.

But if you start making late repayments or miss them entirely, you’ll quickly feel the negative impact on your credit score.

Should I be worried if my credit score drops slightly?

A slight drop in your credit score isn’t always a cause for concern.

The three main credit reference agencies (CRAs) have their own ways of scoring, and these individual scores can fluctuate at times.

But it’s important to watch out for the things that will have a larger negative effect on your credit score. For example, a late or missed payment.

Looking for a credit card?

Compare credit cards using our eligibility checker to find a credit card deal that suits you – and find out if you’re likely to be approved without it affecting your credit score.