We all know that getting into uncontrollable debt and missing payments is bad for your credit score, but the rest can be very confusing and there are a lot of myths about how scores are calculated and the factors that raise and lower them.
If you are currently struggling with debt or have in the past, but have been able to get it under control, your logical aim may be to pay everything off and stick to your debit card. Yet as illogical as it might sound, rebuilding your credit score (or indeed building one up for the first time) is not about getting rid of all your debt.
Borrowing is a good thing, and to improve your credit score you must borrow regularly.
That doesn’t mean taking out a bunch of loans on a whim, but it does mean being strategic about when and what you borrow so you can reap the benefits. For example:
- Borrowing when you can easily afford it.
- Using short-term loans as a quick way to demonstrate reliability.
- Using credit cards instead of cash to show consistency.
Before we go on to further explain how to borrow strategically, let’s recap exactly why your credit score is important and what lenders are looking for when they do a credit check and assess your application.
Why Your Credit Score Is Important
Your credit score is important because it’s a strong factor used by lenders to determine how risky you are as a borrower, i.e. how likely you are to repay a loan or other product and adhere to the terms and conditions.
In turn, this also affects the types of loan product they are willing to give you, the amount they are willing to lend and the interest rates. Having a good score is therefore important if you want to be able to take on something important like a mortgage or get the best credit cards and loans.
Experian’s credit score runs from 0 to 999; with Excellent being (961 to 999), Good (881 to 960), Fair (721 to 880), Poor (561 to 720), and Very Poor (0 to 560). A score towards the bottom end of Fair will begin to limit your access.
Note: There is no one credit score; different credit reference agencies calculate your score differently. Furthermore, lenders don’t always use the same agency when carrying out a credit check and their overall assessment will also be based on their internal policies. That means, for example, one lender may be willing to issue you a £500 loan and another won’t.
However, in general, the higher your score the better. Most lenders will be unwilling to lend to you if you have a Very Poor score, regardless of the differences between them. Such a score could even be a barrier to bank accounts, private renting, car insurance and mobile phone contracts.
What Lenders Are Really Looking For
In the simplest of terms, lenders are looking for those who can make them money and handle their debt, not somebody who is never in debt or somebody who is in so much debt they can’t make repayments.
The score is used as a predictor of your future behaviour, so having never borrowed (meaning you have no track record that can be used to calculate your score) can be just as bad as having a poor history.
Likewise having a poor history and then never borrowing again is worse than repaying your debts and borrowing again, because in the latter scenario you are demonstrating that you can now borrow responsibly.
It is at this point that strategic borrowing comes in to play …
Borrowing strategically is the process of borrowing manageable amounts (even when you don’t necessarily need credit) in order to create a positive track record and (re)build your credit score. After 6 months to a year, your score will have improved and you should begin to get access to better products and terms.
Here are some of the best option and tips for those with poor scores:
Don’t apply for lots of things at once or products that are unrealistic, as this will negatively impact your score.
Budget Mobile Phone Contracts
Mobile phone contracts are noted on your credit report, so applying for the cheapest option makes it likely you will be approved and will allow you to easily manage payments.
Using reputable online services like UkLoanCity, you can query lenders to borrow as little as £100 to be repaid within 30 days. If you already have a few hundred in cash or will get your next paycheck within the time period, this is a good way to show you can borrow responsibly without the hassle of a long-term obligation.
Credit Rebuild Cards
Some credit cards are designed specifically for those with poor credit, offering small credit limits (usually between £100 and £1,200), but with high interest rates. These cards are ideal for those that have just brought their debts under control but don’t have access to other credit cards. Remember to pay at least the minimum and NEVER use it for a cash advance (this can be recorded as a red flag on your report).
Credit Cards Instead of Cash
If you have an existing credit card that is now under control or a new credit rebuild card, use the card when you would ordinarily use cash or a debit card and then put the cash aside to repay it when your payment is due. This ensures you aren’t borrowing what you can’t afford but are still making regular use of the product and building a positive history of repayments.