Your credit score is so important because it affects your finances in so many ways. If you have a poor credit score, you will struggle to borrow money. That means that it’s difficult to get a loan or a credit card if you need one, but it also makes it a lot harder to buy a house and a car, or even get a phone contract. If you have a bad credit score, you need to start fixing it right away. The good news is, you can improve your score fairly easily as long as you start changing your financial behaviour and managing your money better.
The first step is to check your score, which you can do for free online. The scores can be a little confusing because the 3 main credit score agencies measure the scores differently. Experian considers anything over 700 a good score, while anything over 800 is excellent. Equifax considers anything above 660 to be a good credit score. Noddle uses a different system and give you a rating from 1 to 5. Anything above a 3 is good, with 4 and 5 being excellent. Once you have checked your score to get an idea of where you are at right now, you can start working towards improving it. These are the steps that you need to take in order to do that.
Clear Your Debts
The main reason that people have a poor credit score is that they have a lot of debts and they may have missed some payments on those or some of their other bills. That’s why clearing your debts is the first step. If you have urgent debts that you are far behind on, that has a big negative impact on your credit score, so they should be your first priority. In some cases, it may be best to take out another loan to clear urgent debts and give yourself a bit of breathing space. This takes the pressure off and gives you time to organise your finances, and it stops your credit score from getting worse because of late payments. You will have to shop around and get a poor credit loan because most lenders will not give you a loan, but you can still get a good interest rate on them if you find the best lenders. Just remember, you should only borrow more money if it will help you to avoid late fees and stop your credit score from getting worse. Otherwise, you need to find a different way to pay off debts.
Once you have dealt with the most urgent debts by taking out another loan, you can start putting together a plan to pay off all of your debts, which is not as hard as you might think. Debt consolidation loans can make the payments easier to manage and cut back on your interest, so that is a good place to start. If you have a lot of debts, you can also use the debt snowball method. This is where you pay minimum payments on all debts apart from the smallest, and put more money into that so you can clear it. When it is paid off, you can put that extra money towards the second smallest debt, and clear that too. You keep repeating this with all of your debts and by the time you reach the largest ones, you will be able to pay off a big chunk each month.
Set Up Direct Debits On Bills
Now that you are debt free, you need to start building your credit score again, and that means proving that you are responsible with your money. Setting up direct debits on bills that you normally pay manually is a good idea because it reduces the likelihood of missing any, which is important because any missed payments will hurt your credit score. If you can, try to arrange all of your direct debits to go out on the same day that you get paid. It makes it simple to manage your budget because as soon as you get paid, the bills are all sorted and whatever else is left over can be split between spending and saving. You won’t be tempted to overspend and miss bills because you won’t get a chance to see the money.
Register On The Electoral Roll
This is a great tip that will help you to improve your credit score. It won’t make a massive difference, but it does improve your score a little and you don’t really have to do much. You can go on this site to register on the electoral roll. Aside from making you eligible to vote, this proves where you live and that has a positive impact on your credit score. If you don’t want your details to be displayed publicly, you can opt out of the public electoral register and still get the same benefits. You can still do this even if you live in shared accommodation or live with family.
Use Credit Cards Sparingly
A lot of people make the mistake of cutting up their credit cards and closing the accounts when they pay off their debts, but that isn’t always the best way. Using credit cards in the right way can help you to improve your credit score because you prove that you can use credit responsibly. If you use the cards and then pay the balance off in full shortly after, that works in your favour. For example, you could get your weekly shop on a credit card and then put the money aside so you can pay the balance at the end of each month. Buying flights on a credit card is a good idea as well because you get better insurance and it will boost your credit score.
However, you need to make sure that you are not maxing them out because this will have a negative impact. When your credit score is measured, they will look at something called credit utilisation. This means the amount of available credit that you are using. For example, if you have a credit card with a limit of £2000 on it and you spend £1000, your credit utilisation is 50%. Where credit scores are concerned, low credit utilisation works in your favour. So, if you have a card with a £2000 limit and you are spending £300 a month on food, then paying it off, that will give you a credit utilisation score of 15%, which boosts your overall credit score. Anything over 25% may negatively affect your score, so keep your usage to a minimum.
However, things do get a little more confusing if you have a lot of credit cards, and there are pros and cons to having unused cards. Having lots of cards suggests to lenders that you are reliant on credit and can make it harder to get more credit in the future should you need it. But at the same time, having an unused card could help to improve your credit utilisation score. For example, if you have one card with a limit of £2000 and one with a limit of £1000, you have access to £3000 credit. If you do your weekly shop on one card and spend £300 a month, your credit utilisation is then 10%, which is good. But if you closed the card with a £2000 limit on it, your total available credit drops to £1000. If you continue to spend £300 a month on your other card, your credit utilisation is now up to 30%, which could negatively affect your credit score. So, if you have a lot of unused cards, you can close some of the accounts, but you may benefit from keeping one or two unused cards so your credit utilisation score is better.
Building your credit score up again can take time, but if you manage your money well, avoid any more large debts, and use credit cards sparingly, it is manageable.
