Improving and Maintaining a Good Credit Score

A strong credit score is a valuable asset, affecting everything from loan approvals to the interest rates offered on credit products, mortgages, and even mobile phone contracts. Generally you'll pay more to borrow money if you have a bad credit score, though there are bad credit lenders. In the UK, credit scores are usually between 300 and 850, with a higher score indicating a stronger credit profile. Lenders, landlords, and even employers often use credit scores to gauge financial reliability. Fortunately, even if your credit score is less than ideal, there are steps you can take to improve and maintain it.

1. Understanding Credit Scores

Credit scores are based on your credit history—details about past and present borrowing behaviour collected by credit reference agencies (CRAs) like Experian, Equifax, and TransUnion. Key factors influencing your score include your repayment history, total debt, credit utilisation, and the length of your credit history.

• Payment History: Consistent, timely payments on loans, credit cards, and other bills are vital, as missed or late payments negatively affect your score.
• Credit Utilisation: This refers to the percentage of your available credit that you’re using. Ideally, using less than 30% of your credit limit shows responsible borrowing.
• Length of Credit History: Lenders favour borrowers with established credit histories, which demonstrate long-term reliability.

You can read more about credit scores and their significance here on Investopedia.

2. How to Improve Your Credit Score

If your score needs improvement, don’t worry—there are actionable steps you can take. A disciplined approach can gradually raise your score and, in turn, help you access better financial products and rates.

Make Timely Payments

Late or missed payments have one of the most significant impacts on your credit score. This includes all payments tied to credit products (like credit cards and loans) as well as bills for services such as mobile contracts and utilities, where missed payments can also affect your score. Setting up direct debits or calendar reminders can help ensure that payments are made on time, showing lenders that you’re a responsible borrower.

Pay More Than the Minimum

Credit cards give you the option to pay only a minimum amount each month, but consistently paying only the minimum can be costly and may indicate financial strain to lenders. If possible, aim to pay off your balance in full each month. Not only does this avoid interest charges, but it also shows you’re managing credit well.

Reduce Credit Card Balances

High credit card balances negatively impact your credit utilisation rate, which in turn can lower your credit score. To improve this ratio, aim to keep balances low relative to your credit limit—ideally below 30%. Even small, regular payments can chip away at larger balances, improving your score over time. Consider prioritising debt on cards with the highest interest rates, often called the “avalanche” method.

Avoid Applying for Too Much Credit at Once

Each time you apply for credit, a hard search appears on your report, which can temporarily lower your score. Applying for multiple credit products within a short period can be a red flag for lenders, suggesting potential financial difficulties or desperation for credit. To avoid this, limit applications to when they’re truly necessary and consider spacing them out by several months.

Register on the Electoral Roll

Being registered to vote not only boosts your credit score but also makes the verification process easier when applying for credit. Lenders often use this information to confirm your identity, and being on the electoral roll signals stability and reliability. Registering is free and can be done quickly online.

Check Your Credit Report Regularly

Your credit report contains the data used to calculate your credit score, so it’s essential to review it regularly. Mistakes can happen—such as incorrect balances or unclosed accounts—and these can harm your score if left unaddressed. You’re entitled to a free statutory report once a year from each of the main CRAs, but some services like ClearScore and Credit Karma provide free access more frequently. If you spot an error, contact the relevant CRA to dispute it.

Diversify Your Credit Types

Lenders prefer to see a range of credit types in your history, such as credit cards, loans, and even a mortgage. Showing you can responsibly manage different forms of credit may boost your score. However, avoid opening new accounts solely for the sake of credit diversification.

Use Tools to Build Your Credit

For those with limited credit histories or poor scores, there are products designed to help improve credit profiles. Credit builder credit cards, for instance, have low credit limits and higher interest rates but, when used responsibly, can help raise your score. Additionally, services such as Credit Ladder report rental payments to CRAs, helping renters establish a credit history.

3. How to Maintain a Strong Credit Score

Once you’ve put in the work to build your credit score, the next step is maintaining it. Just as with physical fitness, staying in good financial shape takes regular effort. Here are some tips for keeping your score in top condition.

Keep Old Accounts Open

The length of your credit history impacts your score, and closing older accounts can reduce your score by shortening the average age of your accounts. Unless you’re paying a hefty annual fee or the account isn’t serving your needs, consider keeping it open to maintain a longer credit history.

Avoid Large Purchases on Credit

Even if you plan to pay off a large purchase quickly, maxing out your card for a significant amount can temporarily increase your credit utilisation rate. This could cause a short-term dip in your score, which might be problematic if you’re planning to apply for a loan or mortgage soon. Try to spread large purchases across different payment methods or save for them in advance.

Monitor for Identity Theft

Identity theft can seriously damage your credit score, as fraudulent accounts or spending will appear on your report. Many credit monitoring services can alert you to unusual activity or new applications, helping you catch potential fraud early. By staying vigilant, you can address identity theft issues quickly before they harm your score.

Limit “Hard” Credit Inquiries

As mentioned, applying for multiple credit products within a short timeframe can hurt your score. Aim to space out applications and, where possible, use “soft” inquiries, which allow you to check potential rates without affecting your score. Many lenders now offer soft searches, especially for personal loans and credit cards, so you can gauge approval chances without any impact.

Set Up Alerts and Reminders

Most banks and financial institutions now offer alerts for due dates, unusual account activity, and even credit card balances approaching a set limit. These reminders can be extremely helpful for managing your finances, ensuring payments are on time, and avoiding costly mistakes.

4. Tools and Resources

Various tools and services are available to support your credit score improvement journey. Websites like BadCredit.co.uk provide resources, guides, and product comparisons specifically for those with poor or limited credit histories. Meanwhile, personal finance apps like Monzo, Starling, and Money Dashboard allow you to track spending, set budgets, and manage bills, all of which help keep your finances in check.

Some additional resources and tools include:

• Experian Boost: Experian Boost adds on-time payments for utilities, council tax, and other regular bills to your credit report, potentially improving your score. Note that this is unique to Experian and doesn’t apply to other CRAs.
• Credit Karma and ClearScore: Both provide free access to your credit score and report, along with tools to help track and improve your score.
• Debt Management Services: If you’re struggling with debt, services such as StepChange and Citizens Advice offer guidance and debt solutions that can help you regain control.

5. Common Misconceptions About Credit Scores

There are a few persistent myths about credit scores that can lead to unnecessary worry or, worse, misguided actions. Here’s what to know:

• Checking Your Own Score Lowers It: This is false. Soft checks, such as viewing your score through a CRA or personal finance app, don’t impact your credit. Only hard inquiries, like credit applications, temporarily reduce your score.
• Having No Debt Means a High Score: A complete lack of debt doesn’t guarantee a high credit score. Without any credit accounts, CRAs lack sufficient data to determine your borrowing behaviour. Some lenders may view this as a lack of financial experience.
• Closing Accounts Boosts Your Score: While closing unused accounts can help you avoid fees, it can also reduce your available credit and increase your utilisation rate, potentially lowering your score.

Final Thoughts

Improving and maintaining a good credit score requires patience and careful management of your finances. By staying organised with payments, keeping credit usage low, and monitoring your report regularly, you can build a strong credit profile that provides greater financial freedom. Small, consistent actions lead to long-term credit health, benefiting you across all areas of personal finance.