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If you’ve successfully paid off your debts or have recently completed a debt solution, such as an Individual Voluntary Arrangement or Debt Management Plan, then your credit rating (also referred to as a score) has perhaps taken a hit. This means you now need to work on improving it. The good news is, that with some careful planning and smart decision making, you can start rebuilding your credit today.

A good credit rating can help in the future, should you need to take on finance again or are making a big life decision, such as buying a house or taking out a loan for home improvement.

Where to begin

The first place to start, when looking to rebuild your credit rating, is to check your credit report. You can do this by going to a credit reference agency website – such as Experian, Equifax or Callcredit.

They hold information on you and provide a full summary of your credit history, so you can see exactly what is contributing to your credit rating. Lenders also use this to decide if they should give you credit when you apply for it.

How to check your credit report

You can either take on a 30-day free trial at Experian or Equifax – just ensure you cancel this before the period is over – or get a copy of your statutory credit report from these reference agencies for £2.

Callcredit offers a free service for life called Noddle, which gives you monthly credit reports. Bear in mind though that it will also offer you credit products you ‘match’ with and if you sign up to one of these this is how the service makes its money.

How do credit reference agencies work out your rating?

A credit reference agency will gather information from a wide number of sources to work out your credit rating. These include public information sources and also credit account information. Here is a closer look at where they get this from:

The electoral roll

A credit reference agency will use your address to find out what credit products you have linked to it. They will also look at your previous addresses, over the past six years.

This is why it’s so important that you are registered on your local electoral roll, because this confirms your permanent legal address and what credit is under your name at this location. If it is out of date or incorrect your score will be wrong too.

The Registry Trust

Any court issued instructions – like CCJs, defaults or Scottish decrees – are supplied to credit reference agencies via the Registry Trust, on behalf of the Ministry of Justice, to include on credit reports.

The Insolvency Service

For those who take on insolvency solutions, such as an IVA or bankruptcy, the Insolvency Service shares a full list of these agreements with credit reference agencies.

Lender databases

Credit reference agencies and all the major lending companies in the UK work together to share information about customers’ credit agreements. The lenders keep their credit account information updated on a monthly basis and the reference agency then holds it for all lenders to see, for when they are reviewing someone who has applied for a credit product with them.

Here is an example of how this could work:

You have an overdraft with Barclaycard that you are paying off – the bank will upload this information to the credit reference agency. Then you apply for a mobile phone contract with EE – the phone company will take a look at your credit report and they can see that you also have an overdraft in debt. They can then see that you are repaying outstanding debt and this may affect their lending decision.

What is a bad credit score?

A bad credit score occurs when your credit report has any negatives against it, like defaults and late repayments. It is represented by a scoring system but every credit reference agency does this a little differently.

Experian’s scoring goes up to 999 – which is considered to be an excellent score.

  • If your score is between 961 and 999 you’ll enjoy the best credit products out there.
  • A fair score is classed as anything from 721-880 and you may get a good interest rate but the credit limit you are offered won’t be very high.
  • A score between 0-560 is considered very poor and you are likely to be rejected for most credit products.

Equifax scoring goes up to 700 – which is what they consider to be an excellent score.

  • If your score is between 466 – 700 you have the best chance of obtaining credit at a good rate.
  • A score between 380 – 419 is a fair score, again you should be offered decent credit products but not the best.
  • Scores between 0 – 279 are considered very poor and won’t allow you to enjoy most credit products.

Noddle uses a simpler 1-5 rating system, with 1 a very poor score and 5 an excellent one.

But don’t panic, even if your score is low there is a way to rebuild it! Read on to find out.

When to think about improving your credit rating

You probably don’t think much about your credit score – perhaps you’ve never checked it before – but it’s something you should definitely try to keep track of on a regular basis. You definitely need to think about rebuilding your credit score if you are considering the following:

  • Buying a home – getting a mortgage is tough if you have a low score. To have your application agreed at a good interest rate, you need to start rebuilding your score at least a year before you start looking for a property.
  • Increasing your overdraft limit – without a good credit score it’s unlikely your bank will agree to increase the amount you can have on your overdraft.
  • You want a job in the financial sector – some employers in this industry check your credit score to see if you can responsibly manage money.
  • You’re thinking of taking on a large credit product – if you want to renovate a room in your home or buy a new car, you may need to take on a personal loan but a bad credit score can hold you back.

How to build up your credit score

Now that you understand what your credit score means and how it is created, let’s take a look at boosting yours! We’ve put together a comprehensive list of everything you can do to tackle your low credit score and improve it:

Take your time

Rebuilding your credit score takes patience, it’s not something that can be improved overnight. This is why you need to leave plenty of time to rebuild it before applying for credit.

Find a solution for high levels of existing debt

Clearing large amounts of debt will significantly improve your credit score but you may need to sacrifice your score for a certain amount of time, while your debt issues are being resolved.

Many people struggle with high levels of problem debt – whether this is due to a credit product that now has an unmanageable amount of interest and fees or if your circumstances changed while making repayments and you fell behind – but it’s so important to attempt to remove this before applying for any further credit.

A solution such as an IVA or DMP may be the best way to sort a debt problem, but bear in mind that you may have to wait longer before you can start to rebuild your credit score. IVAs, for example, will affect your credit score for up to six years but once it drops off you can start to fix things.

Register to vote

One of the most important things you should do, to ensure your credit score is a true reflection of your credit history, is to register to vote. As we’ve already noted, credit reference agencies use the electoral register to find public information on you and if your address is not up to date the score you see won’t be correct. You can register to vote in just five minutes, via the Government website.

Start small

When it comes to rebuilding your credit rating, it’s important to start small. Applying for big credit products and risking rejections will have a big impact on your score, lowering it even more. Start with things like a very low limit credit card or a mobile phone contract to give yourself a better chance of being accepted and that you can pay off on time regularly, to prove that you can handle debt.

Don’t apply for too many products at once

Lenders can see what credit applications you have made and a large amount of applications in a short space of time may ring some warning bells, suggesting that you desperately need credit or could even be making fraudulent applications.

Rectify any mistakes on your credit report

Once you get your hands on your report, go through it with a fine tooth comb to check that everything is in order. A small mistake can cost you when it comes to your score, so look to check that debt amounts listed are correct and that there are no duplicates, for example. If you spot any of these errors get them sorted straight away – once they are fixed your score will improve.

Make repayments on time and in full

Prove that you can sensibly manage credit by paying off any existing products on time. This could be your mobile phone contract bill or your utilities, just ensure they are always accounted for to avoid defaults or missed payments. A Direct Debit can help with ensuring payments are always made on time.

Look into financial disassociation

Joint debt means that you and someone else are financially linked and if their credit score is poor this can also have an effect on your ability to get credit. Technically, a financial link won’t affect your score but the lender could turn you down if the other person is in significant debt. If you no longer need to be linked to someone – say, if it’s an ex-partner – then look into financial disassociation. This means contacting the credit reference agency, filling out a form and asking for them to break the link between you and that person. They’ll then notify the other two main credit agencies.

Try to avoid moving home too often

Lenders prefer to see one address for a long length of time on your report, as it links to your credit products and provides proof of where you are permanently living. Sometimes we can’t help having to move but it’s something to bear in mind when you are looking to rebuild your credit score.

Ensure there is no fraudulent activity on your report

Identity theft and fraud can quickly affect your credit score and so you need to ensure there is none of this on your report. If you spot any credit accounts that you did not open get in touch with the lender immediately and notify them.

Then you should contact the credit reference agency you are using and also alert them to the fraudulent account – they will let the other two main credit reference agencies know too on your behalf. You should then notify the police and Action Fraud, as this will ensure it is logged.

You should also register for CIFAs, this is a service that helps prevent fraud and you can have something called a Protective Registration notice placed on your credit file. This will let future lenders know that you’ve been a victim so they can take this into account.

Once you have raised the alarm the activity will be investigated and if it is fraud it will be removed, which will improve your credit rating again.

Take on credit if you have none to your name

Surprisingly, having no credit at all can actually lower your score. So if you have taken a look at your report and are surprised your score is low even though there is no debt on there it’s because lenders like to see proof that you can handle credit before agreeing to give you it. Take on a very small amount of credit, which you can pay off on time and in full to show that you can responsibly manage money.

How to build up a credit score with no credit history

If you’re just starting out in the world of credit and borrowing then here’s how to start building up your credit history sensibly for the future:

Open up a bank account

A bank account with a very small overdraft is a good starting point when building up your credit score. If you maintain and manage this properly for at least 12 months before applying for any other credit lenders will view your application more favourably, as it builds up a good amount of non-mortgage credit history.

Set up some Direct Debits

Direct Debits are easy to manage as they automatically come out of your bank account to pay off credit accounts but it also proves you can keep up with repayments on time. Using a Direct Debit service ensures you never miss a payment and you’ll usually get a discount on the cost of a payment too.

Don’t miss any payments

Ensure if you take on any small amounts of debt that you don’t miss any payments. If you miss repayments this can set you back significantly and if a default or CCJ is issued these stay on your credit report for six years even if they are resolved.

When it comes to rebuilding your credit rating, PayPlan can help you tackle any large debts that you need to remove before you take on any further credit. Get in touch with a member of our expert team for free, impartial advice that can help you get back on track today.