Your credit score is the most important factor in determining your ‘creditworthiness’, and ultimately, the amount you will pay for a loan. The higher your credit score, the lower your interest payments on loans and other financial products will be. Today’s economy runs on credit, so throughout your lifetime, a good credit score will save you thousands of pounds on mortgages, car loans, credit cards and more.
How is bad credit treated in the UK?
Bad credit, a low credit score, an adverse credit history – call it what you like, the result is exactly the same. If you have bad credit in the UK, you will find it hard to find an affordable loan. Whatever financial product you wish to access, whether it’s a car loan, a mortgage, or even something as simple as a mobile phone contract, your bad credit will hold you back. Your interest payments may be higher than they would for an individual with a good credit score, or you could be refused credit altogether.
Bad credit can stem from a wide range of transactions. Sometimes, even those with no credit score at all can struggle to access the credit they need. In this article, we’re going to get a closer look at some of the credit impairing transactions that can adversely affect your credit score, and take a look at a few little-known tips and tricks you can use to avoid bad credit.
What factors affect your credit score?
When calculating your credit score, the credit reference agencies will take into account a wide range of factors. As well as credit impairing transactions, there are also some factors that can harm your credit rating without any transaction taking place.
These are just some of the factors that will influence your credit score:
- Your salary
- Your age
- The number of children you have, if any
- Whether you’re registered to vote
- The number of mobile phone contracts you have had
- The number of credit accounts you have
- How much you currently owe
- The age of your credit accounts
- The types of credit account you have
- The number of credit inquiries you have made
- And of course, the payment history on your credit accounts
Credit impairing transactions
Your payment history is the most important factor when calculating your credit score. This includes all payments you’ve made on different types of credit line, like credit cards, small loans, instalment loans, mortgages and even mobile phone contracts. Late payments can badly damage your credit score, as can missing the payments altogether.
Actions taken as a result of late of missed payments will also have an adverse effect on your credit score. This includes debts being passed on to debt collection agencies, statutory demands, county court judgments (CCJs), individual voluntary arrangements (IVAs), debt relief orders, debt management plans and bankruptcies.
Here are some examples of credit impairing transactions:
- Failing to make scheduled payments on time
- Missing scheduled payments altogether
- Failing to pay utility and other bills
- Failing to pay HMRC money they are owed
- Making the minimum repayments on credit cards
- Withdrawing money from an ATM using a credit card
- Open numerous credit card accounts
- Applying for loans with multiple lenders
- Making multiple credit inquiries
- Making a balance transfer
How can you avoid bad credit in the UK?
The obvious answer is to pay your bills on time and make all the scheduled payments on your various credit lines. A missed or late payment will remain on your credit record for at least three years, even if you simply forget to make the payment, so this is certainly something to avoid. But what other strategies can you use to avoid bad credit in the UK?
Register to vote
Lenders do not care about your political allegiances, but do they care about verifying the address you put on your credit application forms. Being registered to vote serves as proof of address. If you’re not already registered, contact your local council or visit aboutmyvote.co.uk.
Close down credit accounts you’re not using
Lenders will be more reluctant to give you credit if you have multiple sources of credit already available to you. In their eyes, this will reduce the likelihood that you’ll be able to repay everything you owe. Closing old credit accounts and store cards could help to improve your credit score.
Don’t make multiple credit applications
You should do your research and apply to a single lender rather than making multiple credit applications to numerous lenders. An individual with multiple credit applications on their credit report could be perceived as someone who is desperate for credit, and this may damage your credit score. Instead, check the lender’s minimum eligibility criteria before you apply.
Check your credit report for mistakes
It is well worth requesting a copy of your credit report from the UK’s three main credit reference agencies – Equifax, Experian and Callcredit – to check the details they contain are correct. Any inconsistencies between your credit report and your credit application could damage your credit score. In some cases, adverse credit events have been attributed to individuals by mistake.
Close joint accounts with a partner with a bad credit score
Your credit score could be damaged by a joint account that is held with someone with a bad credit score. Lenders may assume that your partner has an influence over your income and spending habits, and this could affect your ability to secure a loan. Close these accounts but make sure you repay any shared debts you have.
Try not to move home too frequently
A lender might think that someone who moves home regularly has had problems paying the rent or making their mortgage repayments in the past. A credit application will usually ask for the addresses you have lived at in the last three years. These addresses will also be listed on your credit report.