If you think your credit score has taken a hammering due to the cost of living crisis, we've come up with a step-by-step guide how to give it some TLC.
Your credit score, which is a record of the way you’ve managed your debts and bills in the past compiled by the agencies TransUnion, Equifax and Experian, can determine whether you get accepted for a loan or credit card and impacts the type of deal you might be offered. It can also affect other types of credit agreements, such as mobile phone plans.
UK households are facing a “debt timebomb”, according to Citizens Advice, which said it is helping increasing numbers of people with a negative budget, where their income is not enough to cover the essential expenses, making debt “unavoidable” for millions of people during the cost of living crisis. But if you have a poor credit score by missing payments or defaulting on agreements, you may find you're offered a higher interest rate or can't get credit at all if you want to change mobile phone contracts or banks.
Read more: Step-by-step guide to dealing with debt in the cost of living crisis
The easiest way to find out your credit score is to use an online portal, such as Moneysupermarket's Credit Monitor or Moneysavingexpert's Credit Club. The credit reference agencies all have to provide a statutory credit report for free, although some of the other services such as credit score monitoring could carry a fee. Your report will include all your credit agreements such as loans and credit cards, including any held jointly with other people, your history of credit repayment, including missed payments over the last six years and public records, such as County Court Judgments and the electoral roll
Having no credit leads does not necessarily lead to a good credit score, as it can make it difficult for credit agencies to assess you. Other steps you can take include avoiding spending to the limit on credit cards, ensure you make your repayments on time and never withdraw cash from your credit card.
Alex King, Founder of Generation Money, said: "Credit scores aren't just numbers; they're gateways to financial freedom. Understanding and improving your credit score is the first step towards financial stability and independence. With a strong credit score, you unlock a world of opportunities - lower interest rates on loans, better chances at rental applications, and even more favourable insurance premiums. The key to a secure financial future is understanding and nurturing your credit score. It's time we give credit scores the attention they deserve."
Mr King, a former vice president at Barclays bank, has the following suggestions to help you get your credit score in shape:
Pay all your bills on time: Your payment history is a significant factor in your credit score. Late or missed payments on anything from your electricity bill to your credit card bill can significantly hurt your credit score. Setting up automatic payments or reminders can be an effective way to ensure you never miss a payment.
Regularly check and correct your credit report: Mistakes on your credit report, such as payments marked late when you paid on time, can negatively impact your credit score. Regularly reviewing your credit report allows you to spot these errors and request corrections, which can boost your score.
Keep old credit accounts open: The length of your credit history is a significant part of your credit score calculation. Even if you no longer use a credit card, keeping it open (as long as it doesn't carry high fees) can benefit your credit score by lengthening your credit history and increasing your overall credit limit, which can lower your credit utilisation rate.
Diversify your credit types: Credit scores consider the mix of credit types you have, such as credit cards, car loans, student loans, and mortgages. Successfully managing different types of credit can positively impact your credit score.
Avoid applying for too much new credit at once: Each time you apply for credit, a hard inquiry is made on your credit report, which can lower your score. Applying for several credit lines in a short period can signal to lenders that you're high-risk, negatively impacting your credit score.
Pay off debt rather than moving it around: Owing the same amounts but having fewer open accounts can lower your credit score. Try to pay off debt instead of moving it around, and avoid closing unused cards as a short-term strategy to improve your credit score.
Stay vigilant against identity theft and fraud: Regularly monitoring your credit report can help you catch and address instances of identity theft or fraud that could harm your credit score. If you notice any unfamiliar accounts or charges, report them immediately to the credit bureau and the relevant financial institution.
Set up a direct debit: By automating your payments, you reduce the risk of forgetting to pay your bills on time. This helps ensure a consistent payment history, which is a significant factor in your credit score.
Request a credit limit increase: If you've been a good customer, a lender might agree to increase your credit limit. This can help improve your credit utilisation ratio (amount of credit used compared to credit limits), which is an important factor in your credit score. However, this only helps if you don't also increase your spending.
Use a credit-builder loan: Some financial institutions offer small loans designed to help individuals build a credit profile. The money you borrow is held by the lender in an account and not released to you until the loan is repaid. It's a forced savings program of sorts, and your payments are reported to credit bureaus.
Use a rent-reporting service: Services like CreditLadder or Canopy in the UK report your rent payments to certain credit bureaus, helping you build credit over time. This can be a good option if you're a renter and pay your rent on time each month.
Pay off 'maxed out' cards first: If you use multiple credit cards and one is close to its limit, try to pay off the high-balance card first. This can help improve your credit utilisation ratio and boost your credit score.
Don't close unused credit cards: Unless a card has an expensive annual fee, closing it can hurt your credit score by reducing your overall available credit. Keeping the account open but not using it can help improve your credit utilisation ratio.
Avoid frequent balance transfers: While transferring a balance from a card with a high interest rate to a card with a lower rate can be a good strategy, frequent balance transfers can signal to lenders that you're struggling to pay off your debt, which could negatively impact your credit score.
Are you struggling to make ends meet in the cost of living crisis? Join in the conversation here
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