The financial pressure of Christmas and New Year can push people into taking on credit to help them spread the cost of giving over the festive season. It’s important to carefully consider the future impact of taking out a loan, store credit or opting for a Buy Now Pay Later plan, making sure it’s affordable and not something that’s going to cause money worries later on.
However, if you do decide to borrow money – even if it’s just for a short-term loan – it’s important to understand how your credit worthiness can impact decisions made by potential lenders. It’s important to recognise that there is no actual ‘credit score’ as different lenders will use different tools to measure your credit worthiness when it comes to borrowing money – no matter how big or small the amount.
A higher level of worthiness is a positive sign to lenders, so it is worth taking steps to avoid bad habits that could be detrimental to your financial standing.
Capital One UK has shared some of the ‘simple’ ways that may help improve your chances of boosting your credit score as we head into the New Year.
Ensure you are on the electoral register
Even if you don’t vote, it’s important for your credit score to ensure you register on the electoral roll at your current address, even if it’s shared accommodation or living at home.
Make regular on time payments
Aim to pay your balance on time and in full, including anything you have on Buy Now Pay Later. This shows lenders you’re reliable and capable of handling credit. A good way to make sure you pay on time is to schedule payments towards your credit account, for example through direct debits, or putting reminders on your phone to get notifications of when you need to pay.
Check for errors on your credit report
The smallest errors can impact your score and could be enough to make a lender refuse you credit. It could be as small as a typo in your address, or a debt that has been paid off but still showing as outstanding. If you spot a mistake, it’s important to ask the provider directly to ask them to change it, if it’s a mistake then it’s their responsibility to correct this.
If there was any negative information on your report that occurred during a special circumstance, for example you lost your job or were hospitalised, you can reach out to your credit score provider to ask them to add a Notice of Correction to your report.
Get alerts when your credit score changes
Not only does it help you manage your own credit score by checking it frequently, but it also helps you monitor for any fraudulent activity. Fraudsters can use your personal details to take out credit in your name without you being aware, known as identity theft.
If you see something you don’t recognise on your credit report, it’s important to reach out to the provider’s fraud support team to report this immediately.
Keep your accounts open
The longer you keep your current account and credit accounts open for, the more likely a lender will see you as being able to manage your finances. Most credit scoring systems reward you for having long-standing accounts, so before you close an account after a couple of months, think how this could have a long term effect on your credit score.
Think about your credit utilisation
Your credit utilisation is effectively the percentage you actually use of your cumulative credit limit. If your card has a limit of £1,000, and you end up only using £500 of that, your credit utilisation score would be 50%. The lower the percentage, the more positively it can be seen by your lenders.
Avoid moving loads
While this isn’t always possible, if you are renting, try avoiding moving every couple of months. Lenders like stability, and the longer you are at an address, the less likely it’ll influence lenders’ decision to offer you credit.
Try a credit builder credit card
Having little credit history can be one of the biggest barriers to getting a good credit score as lenders struggle to assess you.
Credit builder cards can help build your credit score and improve your chances of being offered credit limit increases, should you use your card sensibly. This can be as simple as making your monthly minimum payment on time and staying below your current limit. It’s important to note that if you don’t do these things, you could harm your credit score.
Manage your overdraft well
Some bank accounts have 0% interest rates on their overdrafts, but it’s important to see it as there for a rainy day only, not as part of your regular budget. An overdraft is a loan, and going over your arranged overdraft limit, or regularly using an unarranged overdraft, can negatively impact your credit score.
Research before getting a credit card
Whenever you apply for a credit card or Buy Now Pay Later service, it can leave a search mark on your credit report. If you make too many searches, it can reflect badly on your credit score and lead to rejection.
You can use eligibility checkers such as Capital One’s QuickCheck to see if you are likely to be accepted before you apply.
These eligibility checkers use soft search, meaning that while you can see the search, the lenders can’t, so there’s no impact on your credit file.