At some point in your life, you will probably like or need to apply for credit, which comes in many forms including a loan, credit card, overdraft, store card or mortgage. But apply for credit and being accepted for credit will always be determined by your credit score and your credit history.
What is a credit score, and why do you need it?
Everyone has a credit score. A person who has a good repayment history, who has taken and repaid credit over time will most likely have a good credit score, which is represented by a number. This number will be lower if repayments have been missed, or credit is not even taken. A high or low number, good or bad credit rating ultimately defines how lendable you are, and how much of a risk it is to the lender to provide you with credit.
Your score will determine:
- The amount of money you can borrow
- The interest rates you will receive
- Whether you are eligible to apply for credit
A good credit score will be based partly on your credit history, which is a record of how much you’ve borrowed, how well you have managed repayments, and whether you have been in debt.
It's important to build a good credit score before searching for the best deals on the market. Read our article listing the steps to improve your credit score here.
Ways to build a good credit history
There are some simple steps you can take to start building a credit history, including the following tactics.
Open a bank account
To build a credit history, you first need the facility to manage, spend and make repayments. Running a current account responsibly is an important part of building a good credit history as it shows your ability to manage your finances and make repayments on-time.
Opening and managing a current account responsibly will help your credit rating even if the account doesn’t include an overdraft. Have a look through our current accounts using the button below.
Set up and pay direct debits
By setting up Direct Debits for regular payments, such as utility bills or your car insurance, and then making sure the arranged payments are successfully met, you will be improving your credit rating as it helps to prove how ‘lendable’ you are, and reduces your ‘risk rating’.
On the other hand missing a payment will count against you, and if the matter escalates to the lender having to go to court to recover any money, then a county court judgment (or decree in Scotland) could be issued against you, which will severely affect your ability to get credit and it will remain on your file for six years.
Are you on the electoral register?
Lenders use the electoral register to ensure you live at the address you give during your application, as it has to be correct when you register to vote.
If you have not got around to adding yourself to the electoral register, it's wise to do so.
How your credit rating affects the interest rate you’re charged
Your credit rating may also influence the rate of interest you are charged on any borrowing. Once a provider has run a credit check on you, they may decide to reprice the deal you have applied for, to reflect any problems they may have found in your credit file.
You can find out more about credit card interest rates and repricing here.
Who works out your credit score?
Technically, you don't have a single number or credit score which represents you financially. Each lender will use their own policies and preferred information when calculating your credit score, or borrowing risk.
When an application is made for credit, most lenders will perform a check against the information held with one of three credit reference agencies:
There are a number of companies, such as Credit Angel, who provide a range of services to help you manage and improve your credit score, and usually, offer a free trial to help you get started. It's a great way to make sure your credit report is accurate and up to date before making an application for borrowing.
When you are happy with your credit score, the accuracy of your details and your financial situation, it's still wise to shop around to find the most suitable credit product for you, and making your own assessment on how affordable the repayments will be. A good start is to use our free moneymatcher tool for credit cards to narrow down your search and find out your eligibility.
Read more about your eligibility here, and find out more about steps you should take before applying for credit.