Three Key Ways to Improve Your Credit Score

*This is a collaborative post on key ways to improve your credit score

What is a credit score?

A credit score, simply put, is a value placed on your reliability with regard to handling credit and debt. The less reliable you are at making repaying debts, credit or overdrafts, the higher risk you are to lenders. And therefore the lower your credit score. The lower your credit score, the less likely you are to be approved for new lines of credit. This includes loans or even mortgages. Contrary to popular belief, there is no central credit scoring system; rather, there are three credit reference organisations, private companies which lenders and banking platforms retain the services of: Equifax, Experian and Callcredit. These agencies perform background checks. This builds a reliable picture of your credit history, using proprietary algorithms to generate a score based on your activity.

How could your credit score be affected?

There are a number of factors taken into consideration when generating your credit score. But there are a few key reasons your credit score may be low, or ‘poor’. Firstly, you may have fallen foul of any credit agreements you’ve made with a bank or lender. Underpayment, late payment or missed payment of a loan instalment, mortgage payment or credit card will adversely affect your credit score. If a lender believes they will not receive the amount owed from you, they may file for a County Court Judgement. This means a court can order you to repay the full amount in a lump sum or instalments. A CCJ can remain in your credit history for years, especially if it isn’t honoured.

However, the most likely reason your credit score is low is that you have no credit history to speak of. If you’ve never borrowed from a bank, applied for a mortgage or used a credit card, there is no information for a credit reference agency to collect. As such, it is difficult to predict how reliable you could be with credit. This makes you a potential risk to lenders and resulting in a poor credit score. In order to improve your likelihood of being accepted for credit or loan applications, you will need to build – and improve – your credit history. But how?

How to improve your credit score

Manage your repayments

If you have any outstanding debts, your first step should be to draw up a personal repayment plan. You should ensure you wipe your debts as quickly as possible. If your poor credit score is a result of struggling to make your repayments, reach out to your bank and lenders. You may be able to renegotiate your credit agreement. You may end up paying more back in the long run, but meeting the terms of your credit agreement is crucial. It will prevent further debt, and improve your credit score.

Build your credit history

If you have no debts, you will need to create a credit history – but creating a credit history can be difficult when conventional lenders refuse to lend to you on account of your credit score. As such, you should make use of a credit builder card, or take out a bad credit loan with a credit provider. These tend to have higher rates of interest, but that shouldn’t pose an issue to you if you make repayments on time.

Maintain your credit balance

Lastly, to preserve and improve your credit score, you should take care with the amount of credit you use. By keeping your credit balance – or the amount of credit you use from what’s available to you – below 30% of your credit limit, you keep repayments manageable, ensuring you can build your credit score without falling behind.