Below I will explain the key information you need to be able to understand and improve your credit score. This industry works with smoke and mirrors to try and confuse and conquer the average citizen. Unsurprisingly it is in their best interest to make this process as difficult as possible, this allows them to keep charging you higher rates and sell expensive products to “help” fix problems that can be easily rectified.
I aim to demystify the process and arm you with the knowledge to take back control and get you that all-important excellent credit score. Then, even more importantly, once you have it, how to leverage it to your advantage.
What Can Excellent Credit Get You – Why You Need It
Whilst you can survive with bad credit, it’s definitely not easy, or cheap. You’ll get penalised on every interaction with the financial industry, resulting in higher interest rates, the requirement for higher deposits for purchases or even being denied access to certain products and services.
As technology enhances, more data points will be collected and new services will be linked to your credit score. Understanding the fundamental drivers behind this score, and what you can do to improve it is only going to become more and more essential.
With an excellent credit score, it gives you more negotiating power to get lower interest rates, lower deposits, and access to more products and services. This can save you a ton of money and has the potential to drastically improve your life.
Of course, you’ll also have bragging rights, especially if you can reach the perfect credit score, although any progress is worth it. You’ll also have confirmed to yourself you can understand and execute strategies within the finance industry and be able to impart that wisdom to help those around you.
By landing on this page, I hope I’m just preaching to the choir with my emphasis on the importance of getting an excellent credit score. Although if not, I hope this has given you some inspiration to make some changes or even set this as your financial goal.
If you want to know more about setting financial goals, here’s a guide to get started.
What Makes Up Your Credit Score
- Payment history (35%)
- Credit utilisation (30%)
- Length of credit history (15%)
- Total lines of credit & credit mix (10%)
- Total hard credit searches (10%)
Each of these factors listed above influences your credit score, some more than others. Below I’ll go into more detail on each factor, explaining how it works and what you need to do to improve it.
Payment History (35%)
Many people ask what makes up the largest portion of your credit score, thinking if they can just fix this one area their score will instantly shoot up. Whilst properly understanding how payment history affects your credit score, there are many quick wins across each of the 5 areas, so make sure you give each of them enough attention.
Payment history is exactly what it sounds like, a track record of the payments you’ve made to other credit accounts. This can be anything from your mortgage to credit cards.
What the credit bureaus and lenders are looking for is whether you’ve paid previous credit accounts on time. Understandably this is quite an important measure of the likelihood that you’ll pay future financial commitments and is why payment history makes up the largest portion of your credit score.
Tips to improve your credit history
Pay your bills on time.
This sounds simple, although in practice people don’t give this as much attention as they necessarily should. One recently missed payment can be all that it takes to drop a significant number of points, possibly even stop you getting that all-important excellent credit score.
If you do miss a payment for whatever reason, try and contact the lender as soon as possible as they may be able to offer an arrangement instead of reporting it as a missed payment to the credit agencies.
Also, remember that if you pay the minimum payment on your credit card that still counts as a successful payment. This adversely affects a significant number of people and is easy to fix. You will still have to pay the high-interest rate on the amount owed so please try and avoid this, although you won’t be penalised on your credit score as well.
Have multiple sources of credit.
As counter-intuitive as it sounds, the more credit accounts that you have can actually be a good thing. This is due to the way the credit bureaus and lenders calculate your payment history as it’s done in percentages.
To show this in an example, say you have had 1 credit card for 4 years, this means you have had 48 total monthly payments. If you were to miss one payment, the way your payment history is calculated is to take the 47 on-time payments and divide that by the 48 total payments to give you a 97.9% payment ratio.
Using the Credit Karma payment history calculator shown below, this would put you in the red category and cause a significant adverse effect on your score.
Now if you were to have 3 credit cards for 4 years and miss that same one payment, that would mean you’d have 143 on-time payments out of 144 total payments. Now that increases your on-time payment ratio to 99.3%, firmly placing you in the green category.
Hopefully, this highlights the benefits of having multiple sources of credit. This strategy can also help when you’re trying to reverse the negative effects of previously missed payments, as every month your total number of on-time payments increases, making the missed payments less relevant a lot quicker.
Credit Utilisation (30%)
Making up 30% of your credit score, credit utilisation still a significant factor contributing to your overall total and is often overlooked. This is the percentage of the total credit you use on a monthly basis.
For example, if you were to have an £8,000 credit limit and you were to spend £3,000 in a month, your credit utilisation would be 37.5%.
In order to get an excellent credit score, the bureaus are wanting to see that you have a credit utilisation of below 10%. This shows that you’re not going out and using all of your available credit and you don’t need all the money you have access to because you’re great with money.
When you have a high utilisation, it may indicate that your finances are overextended and in the eyes of a lender, you have less flexibility to handle any unexpected payments, making you a higher risk.
In my opinion this is an extremely unfair metric as it penalises those people that can only get a low credit limit as it’s very easy to spend past the 30% utilisation.
For example, when people get their first credit card or are trying to rebuild their credit, getting a £1,000 limit may be the only option. This only leaves them with £300 that they can spend before they actually adversely affect their score, and are often not even aware of this could cause a problem.
Although now you’re armed with this knowledge of how to manage your credit, you can use this to your advantage. This can be one of the areas that yield the fastest credit score improvements as the changes can be updated on your report within a month.
Tips to improve your credit utilisation
Increase your available credit
By increasing your available credit you effectively increase the amount your are able to spend each month whilst being able stay within the boundaries of what the agencies are looking to see.
This can be done in two ways, either to apply for new credit cards or apply for higher limits on the cards you already own.
When applying for new credit cards, just make sure that you have a good enough credit score to begin with so you don’t get refused for credit and have that adversely affect your score. Ideally use a soft search credit card check where they gauge the likelihood of acceptance for a card before you fully apply. Aiming for cards that have notoriously high credit limits is also another good tactic, with American Express regularly starting with limits at £10,000 or more.
If you want to know the difference between a soft search and a hard search, I go into more detail later in the post.
When you already have a credit card, you can apply for credit limit increases. Ideally, wait 6 to 12 months between requests and this will allow you to be constantly lowering your credit utilisation and improve your score.
Pay off your credit card each month
By carrying a balance on your card each month, it’s harder to have a lower utilisation because each month you’re only adding to the total amount. If you clear the balance each month then you’re starting from zero, making it easier to manage.
You’ll also have the added benefit of not paying any interest which can be extremely high for credit cards and the money will be best served staying in your pocket.
Pay part of your balance early for large payments
If you do have to make a large purchase and don’t have a huge credit limit but still want to take advantage of the numerous credit card benefits, you still can. This happens a lot as credit cards offer better consumer protection and rewards on purchases, although you don’t have to let your credit score suffer as a result.
You can make a partial payment of the balance part way through the payment cycle to reduce the balance to a certain level or even clear it entirely. Then when your credit card company submits your balance to the credit bureaus it will be at the lower figure.
Although if it’s only a temporary increase, it’s not the end of the world and your credit score should return back to the original levels once the balance is paid off.
Length of credit history (15%)
As the name indicates, this metric is based on the average length of time each account has been open, so in this case, length does matter! If you were to have a credit card open for 7 years and another card open for 3 years, your average credit length for those two accounts would be 5 years, placing you in the amber category shown below.
Typically lenders want to see that you’ve had a long and stable credit history. Opening new accounts will most likely temporary reduce your score, although this metric is something you have to take a long term view and new credit will often .
Tips to improve your length of credit history
Keep your old credit accounts open
Many people believe it’s a good thing to close old credit lines if they no longer need them. This can negatively impact your score, especially if it’s an account with a long history.
If you have a card with annual fees it’s understandable that you may want to close it if you’re not going to use it. Instead of closing it, see if there are any options to downgrade the card to a free option, allowing you to keep the credit line open.
You’ll also have a number of other benefits, including having a higher total credit limit to help your utilisation.
Be Mindful Closing Your Old Bank Account When Switching Accounts
In the UK the Current Account Switch Service (CASS) has helped many people switch to a better bank account, although banks encouraging people to switch their main account happens across the world.
What many people are unaware of is how this can impact their credit score as they’re usually switching their oldest account to a new one and being actively encouraged, or even forced to close their old one, especially when sign up bonuses are involved.
To get around this, what I have done is open a new bank account and use that in the switching process, leaving my old account intact and preserving the history.
Signing up for multiple bank accounts to benefit from the bonuses is referred to as bank account churning. This can be a great way to earn some quick money, although now you’ll be equipped to make sure your credit score doesn’t suffer as a result.
The earlier you start the better
The more credit history you can build the better, so I always encourage people to get a credit card as soon as they can to start building their history. Of course, this is only the case if people can manage the card responsibly as can have more damaging affects is misused. I emphasise to people who are new to credit cards to just treat it like a debit card that has extra perks.
Patience is key
This is one of the metrics that you can’t really rush. My average credit length is around 3 years as I’ve taken out a few new accounts and switching bonuses in recent years. This places me in the red category according to Credit Karma and I still have an excellent credit score. So don’t worry too much about this one, just try and avoid the major pitfalls that are easily avoided that I’ve gone through above.
Total lines of credit & credit mix (10%)
This one is probably the most counter-intuitive metric as you’re basically being rewarded for opening up more credit cards and taking out more loans.
You’d imagine the person that doesn’t have many credit cards and loans would probably have the highest score. In fact it’s the opposite.
If you apply for more credit, then you effectively increase your credit limit, lowering your utilisation and having more on-time payments. As I’ve highlighted before all this contributes to a higher credit score.
Then having a mix of different credit lines open, such as having a mortgage, a car loan and a credit card shows lenders that you can responsibly handle multiple different kinds of debt without defaulting.
Tips to improve your total lines of credit & credit mix
Don’t put too much emphasis on this metric
Credit Karma shows they want to see over 10 accounts to get into the green category, which in my opinion is just ridiculous. For many people, this is going to take a long time to work up to and as this only makes up 10% of your score there are other things you can do to get more benefit.
If you can just get up to 6, that should give you enough benefit to easily make it up to an excellent credit score. So as an example, 2 bank accounts, 3 credit cards and a mortgage should be all you need to get to an excellent credit score and that’s still probably overkill.
By prioritising this metric, you may actually do more harm than good if you significantly reduce your average credit length or start paying unnecessary interest charges. Just working within manageable levels should be all that’s needed to get an excellent credit score unless you’re truly trying to make it to a perfect score.
Utilise interest free credit
When making a purchase, many companies offer interest free credit to spread your purchase over a number of years. On your credit report, this is effectively a loan the company is giving you so is an extra line of credit.
These types of loans should only be used if you were going to buy the product or service anyway and have the money set aside, so is just an added bonus. This way it keeps the money in your pocket, so you have more of an emergency fund or can invest with it instead.
Total hard credit searches (10%)
When you take out new lines of credit the lender performs a hard search on your credit report. This helps the lenders keep track of how many times you’ve requested credit and they’ve worked out that the more times you ask for credit, the riskier you become as a borrower.
This is because if all of a sudden you start requesting a load of new credit lines, this raises the concern that your circumstances may have changed.
For example, if you apply for 2 new credit cards, a car loan and a mortgage all in the same month, this will get the lenders worried that you may be running out of money and may not be able to pay them back. As a result, your credit score reduces.
It probably comes as no surprise that the optimal number of hard inquiries is zero. However, the good news is that hard searches only appear on your credit report for 2 years and they only impact your score for 1 year. After this time they drop off your report and it’s like they never happened.
Tips to reduce your total hard credit searches
Know the difference between hard and soft credit searches
Simply put, a soft search does not affect your credit score, although a hard search does. A hard search is done by a lender when you request credit for a detailed understanding of your credit history. A soft search just provides high-level details and searches are only visible to you on your report.
Soft searches are often used by comparison sites as it allows companies to make an educated guess of your circumstances and you can use this to your advantage. This is especially true if you don’t have the highest credit score and are unsure whether you’ll be accepted as this can give you an early indication and avoid applying for credit where you may be denied.
This often causes a downward spiral for people that aren’t aware how hard searches impact their creditworthiness. If they were to apply for a credit card and be denied, they now have a hard search. So they try again at a different company and are denied again. This continues until they have multiple hard searches, causing serious damage to their credit score and making it practically impossible to get the credit they may desperately need.
So avoid the trap and utilise soft searches.
Performing multiple searches for a mortgage or car loan – is it bad?
Understandably when you’re buying a house or getting a new car you want to shop around to get the best rates. However, this does present the problem of having multiple hard searches on your credit report in quick succession.
Fortunately the credit bureaus usually group all these searches into one overall search as they’re for the same purchase. The key thing is to try and do them as close together as possible.
For example, if you went to multiple different banks looking for a mortgage in a month, that would only count as one search. However, if you were then to wait a few months and then do the same process again, that would count as a separate search. This is to promote you shopping around for the best rates and not penalising you on your credit score, which is excellent in my opinion.
Temporary pain for long term gain
If you do need to take out a number of new credit lines to start you off on your excellent credit score journey, it’s best to do it now and set the 12-month clock ticking. You may see a small drop at first, although this may also be due to reducing the average length credit on your report.
As it’s only worth 10%, the number of searches shouldn’t have too much effect, although it’s best to do it early so when you need that higher credit score the hard searches have already dropped off your report and you’re good to go.
How to check your credit score for free
By law in the UK, US and many other countries, credit agencies have to give you free access to your credit report every 12 months. Below I’ll run through a few places you can access your credit report for free and avoid some unnecessary charges.
Credit Karma gives you free access to your TransUnion report. I recommend using this service as it’s completely free for life, not just 30 days and gives you a great overview of the different section of your credit report.
They do recommend certain products and services through their site, so make sure you do your research to make sure it’s right for you. Overall, they’re a great option if you want a quick and easy to monitor your progress which should be all that’s needed to get to an excellent credit score.
If you’re looking for a more comprehensive report, you can go directly to each of the credit bureaus and they will provide you with a statutory report, links below.
Check all 3 credit scores at the same time free
They’re free, although CheckMyFile is only free for the first 30 days, so make sure you cancel it before the charges start.
Minimum Credit Score Needed for Certain Purchases
Many people are looking for the minimum credit score needed to buy certain products and services. This can be anything from getting a mortgage to buy a house, renting a flat, securing a credit card or leasing a car.
For many products and services, there isn’t a minimum credit score to apply, although the lower your score the less likely you are to qualify or you may be offered less favourable rates and terms. It may be best to wait until your credit improves before applying for certain services, such as a mortgage, so you can secure the best rates, especially for products and services that you’re going to have for a long time.
Common Credit Score Myths
Carrying a balance on your credit card is good
The thought process seems to be that if you carry a balance on your credit card at the end of each month, then there is something to report to the credit bureaus.
To be clear, this is absolutely not the case and the ideal position is to clear your balance each month. The best thing to do is to set up a direct debit each month to automatically pay any balance which will show up on your report as an on-time payment. This will also make sure you don’t get any unnecessary interest charges and ensure you avoid any missed payments which can decrease your credit score.
Having more than one credit card is bad
Some people believe that you should only have credit cards if you need them and close any unused cards. This is definitely not the case. Having credit cards open for a long time and with high credit limits will most likely improve your credit score. As long as you’re paying off any balances each month
You can’t get a credit card with a bad credit score
People often write-off being able to get a credit card because they have a bad score. Although companies usually offer more favourable rates to those with better scores you certainly don’t need to wait to get an excellent credit score before you apply.
Most likely you’ll be offered a card with a slightly worse interest rate or a lower spending limit. If this is the case, as long as you pay off the balance at the end of each month, ideally with direct debit, and don’t spend over 30% of the total limit you’ll be completely fine. It will probably help improve your score too.
Is It Worth Increasing Your Credit Limit?
This is a common question that keeps coming up, and in short yes. By reading this post I’m hoping you are now well informed of the various factors that can influence your score.
However, to answer this specific question, when you increase your credit limit, it allows you to more easily stay within the utilisation limited when you are regularly spending. It’s essential that you keep your credit utilisation below 30%, so only spending £3k maximum if you have a £10k credit limit. Ideally you’ll keep this to under 10% as you are awarded more points if you can achieve this as it shows the credit bureaus you don’t need all the credit you have access too, highlighting you’re a low risk (in their eyes!).
Typically you can request a credit limit increase every 6 to 12 months, and as long as you are just using it for increasing your credit score and aren’t just going to spend it, then increasing your limit is definitely a good choice. This is especially true for people that currently have a very low limit, such as £1k where spending only £300 in a month would push you over the recommended maximum utilisation.
What credit cards do I have and why?
This question has been asked a number of times so for those interested I’m going to run through what credit cards I own and why I have them.
I personally have 3 credit cards. This combination allows me to earn the most amount of rewards and cashback for my spending habits, although I’ll explain the principles behind it as a number of other card combinations can produce the same effect.
- American Express Platinum Cashback credit card
- Barclaycard Freedom Rewards credit card
- Santander Zero credit card
Firstly my American Express is my go-to card for all possible purchases as it yields the most reward with around 1% cashback. Surprisingly a number of people I talk to still think an American Express is an elitist card that can’t be used anywhere and is mainly for show. In recent years they’ve made huge drives to increase usage in more local areas, such as with the “Shop Small” campaigns, so you’d probably be surprised how widely it’s accepted. All major supermarkets and retailers do, and for our American cousins, your rewards and cashback is even higher!
Next, my Barclaycard is my back up card. Basically wherever I can’t use my American Express, I’ll revert to using this card as it’s practically universally accepted everywhere, except in the odd local pubs I may frequent. This card still yields a small reward, it isn’t much at around 0.25-0.3% but is better than nothing and is always a nice hidden bonus.
Finally my Santander Zero card. I use this when going abroad as has zero foreign transaction fees, hence the name. Unfortunately, there aren’t any other rewards, although spending abroad can be a costly business if you aren’t prepared so this is a huge money saver.
Other additional benefits – helps my credit score
Previously I’ve highlighted how important credit utilisation is as a factor that influences your credit score, 30% to be exact. The mixture of these 3 cards gives me over £30,000 in available credit, with half coming directly from American Express. I know they are renowned for giving high credit limits and wanted to reiterate the point. This combination allows me to spend over £3,000 a month without breaching even the 10% utilisation threshold, allowing me to maximise the benefit and maintain an excellent credit score.
In the earlier sections on credit history, I highlighted how having multiple credit cards can actually help prevent any negative effects of having missed payments. Thankfully to date I haven’t missed a payment, although that’s not to say that won’t ever happen, so having an on-time payment buffer is definitely useful if the worst were to happen.