How much you can borrow usually depends on your credit score. But how do you check or improve it? Here we look at the best steps to improving your credit rating.
If you’re in the market to buy a new car, you may be considering borrowing money via a car finance deal.
It's the most common way to buy a new car, with 91% of all new car sales in 2021 made through a car finance deal, according to the Finance & Leasing Association.
There are lots of options. You could go with a credit package offered by a dealer – such as a personal contract purchase (PCP), hire purchase or leasing deal. Or you could get a personal loan to pay for your car.
To get a competitive deal, you need a good credit score. If your credit history isn't looking its best, it's worth improving your credit score before applying for car finance.
Looking for finance on a new car?
How can I improve my credit score?
There are several ways to improve your credit score, including:
Register to vote
Make sure that you're registered on the electoral roll at your current address. This helps lenders confirm your name and address, making it easier to pass their verification checks.
Build up your credit history
If you're looking at how to improve bad credit, it can take time to get things in order. Missed payments stay on your credit file for 6 years, so getting your score back to a respectable level may be a long process.
But it's possible. And a good first start is working towards paying down any outstanding debt. You should make sure that any late or missed payments are settled.
Repay loans on time
Late payments harm your credit score so try to pay back any loans on time. An easy way to do this is setting up a direct debit so the payment is made automatically.
Keep to your credit limits
If you've maxed out your credit card, or you're always close to the limit on a personal loan, this can harm your credit score. Try to only borrow what you need and pay debts off as soon as you can.
Don't make multiple credit applications
Making several unsuccessful applications for credit in a short space of time can harm your credit score. It can look like you're not able to manage your money and you are desperate to borrow more.
That’s why it’s a good idea to check your file before you apply. You can also use a free eligibility checker to see what the likelihood of being accepted is before you apply.
Regularly check for errors on your file
You might find mistakes on your credit file, like repayments marked as late when you believe you paid on time. Or there might be fraudulent activity, like someone applying for credit on your behalf.
If you find anything like that, you can contact the lender in question or the credit reference agency itself to try to sort things out.
You should also check that your personal information is correct on your file. If there’s any difference between what you put on a loan application and what a lender sees on your credit file, it could count against you.
Consider a credit builder card
Using a credit builder credit card is one way to improve your credit score. They allow you to borrow small amounts and they can boost your credit score if you pay them off every month.
However, these cards usually come with high-interest rates so make sure you're only getting one if you'll be able to clear it each month.
Pay household bills on time
It's not just debt repayments that can impact your credit score. Late payments for your council tax or energy bill can harm your score too.
Try to make all of these payments on time. And if you're struggling, speak to your provider at the earliest opportunity.
Watch out for joint accounts
Having a joint account can be a useful way of managing your bills and money. But if you open a joint account with someone with a poor credit score, this could impact your ability to borrow in the future.
What is a credit score?
Any time you take out credit, the provider will check whether it thinks you'll be able to repay the money you borrow or meet your monthly bills.
It does this by looking into several factors including:
- How much you earn
- What other borrowings you have made
- Whether you’ve been able to meet repayments on other forms of credit
Taken together, these factors are used to make up an overall score. Different companies have different ways to work out these scores - some might use a scale of 0 to 1,000, for example.
Once they've worked out your a credit score, the company will then decide whether to offer you any credit at all.
Then, if they decide they can lend to you, the company works out the annual interest rate it is going to charge.
The better your credit score, the better the rates you're offered. This is why it's important to improve your credit score before you apply for credit.
How do I check my credit score?
Before you apply for credit, it's worth checking your credit file to make sure it’s accurate and up to date.
In the UK, credit files are held by 3 main credit reference agencies:
Each company offers people the chance to pay for detailed copies of their credit reports.
These usually include each agency’s own actual score. You can also order a free copy of your statutory credit report from any of these agencies.
This is a basic version of the information on your credit file. But it should be enough for you to check whether it’s accurate and spot any potential problems.
Why should I improve my credit score?
Improving your credit score can help when you apply for credit. That's because if you have a good score, you're likely to be offered cheaper interest rates.
Improving your credit score isn't a quick fix though - it takes time. Especially if it's been badly damaged in the past.
But it is possible to boost your score, which gives you a better chance of being approved at a competitive rate for credit in the future.
How can I report any errors on my credit file?
If you spot an error on your credit score, it's important to correct it. If there's a mistake on an address, for example, this could harm an application for credit if the locations don't match up to your current address.
You need to contact the lender and tell them to correct the problem. You could also contact the credit reference agency you're using. Once the errors are corrected you should see an improvement to your credit score.