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Improving your credit score

Mark Littleton-Gray

Credit Scores – How they work

Any organisation or individual requiring credit should be aware of how they will be assessed for credit risk.  One of the tools used by any potential lender or supplier will be the borrower’s credit score also known as a rating.  A borrower may not know what their score is from one day to another but should be aware of how it is assessed and viewed.

Most domestic credit providers only use credit scoring as with mass credit applications they cannot afford the time to assess more individual factors.  More specialist lenders will use the credit score in conjunction with their own policies and enquiries.

The best-known UK credit rating agencies are Equifax and Experian, but there are others and whilst some may have an individual rating style, all rating agencies will base their score on data relating to:

1. The number of bank/credit accounts the borrower has;
2. The type of accounts;
3. Available credit;
4. Length of credit history; and
5. Borrower’s payment history.

All rating agencies receive commercial information from a variety of sources, both public and private. Private information is that shared between those lenders that subscribe to a particular ratings agency. Any borrower that has a credit arrangement with a commercial lender or trade supplier will have their payment history recorded by that lender or supplier and that information will be shared with the rating agency.  Public sources will include the Courts service for monitoring of HM Court judgments, Companies House and the Insolvency Register.

Depending on the rating agency, a credit score typically is expressed as a number between 0 and 1000. The higher the number, the less perceived risk for the lender, and the borrower will generally receive more favourable terms such as lower interest rates.  Equifax score up to 600, Experian up to 1000, and a borrower’s credit risk may be banded as follows:

Risk profile Equifax  Experian
Very Poor   under 278   under 560
Poor   279 – 366 561 - 720
Fair   367 – 419 721 - 880
Good 420 – 466  881 - 960
Excellent   467 + 961 +

Borrowers should obviously aim to achieve a good or excellent rating.  A lower rating does not preclude credit being granted but terms may be less favourable or affordable. The driver behind obtaining credit is to show that a borrower is able to manage credit successfully and has an existing credit history with little or no adverse issues.

For example, a high net-worth borrower who has never obtained credit may have a similar score to a borrower with low or no net-worth who has previously borrowed  and  repaid without any adverse issues.
A borrower who has previously defaulted but ultimately repaid a debt in full (albeit late with additional interest and penalties) will invariably have a lower score simply because of the default despite repaying the debt in full.

How can a borrower improve their score?

1) No short-term fix
Remember that a credit score is the sum of various factors over time.  There is no short-term fix to improve a score so good credit behaviour should be practiced over time.
2) Pay on time, every time
This may seem obvious, but all defaults are recorded, so ensuring payments are up to date and stay that way will keep your score where it needs to be.
3) Early settlement
This may also assist, albeit less so and the borrower will have to take account of early settlement costs.
4) Lessen gearing/Improve liquidity
Reducing existing borrowings such as overdrafts by utilising available capital will also assist. This will also help reduce borrowing costs.  However, beware debt consolidation.  Simply borrowing from X to pay Y and Z will not reduce your score if the sums involved equalise; although it may be advantageous to reduce ongoing interest charges that may ease long-term repayment issues.  It should be noted that, in this instance, capital provided by private loans to borrowers (e.g. from family members) will be not be visible to a commercial lender, unless declared.
5) Don’t close existing credit accounts
This might seem counter intuitive but the number of accounts and how they are maintained contributes to the score.  It also contributes to the total unutilised credit any borrower has available to them.  A borrower with say ten credit accounts that is using on average 25% of each (so their total credit facility is only 25% utilised) will have a better score than a borrower with three accounts at 95% utilisation.
6) Don’t be in a rush to obtain more credit accounts than you need
Applications for credit are usually reported to a credit rating agency.  Any application may affect your credit score and unsuccessful applications detrimentally so.
7) Domestic credit impacts upon business credit for the self employed
Remember that if your business is not incorporated, then your credit score will be assessed on both your domestic and business financial arrangements.  Therefore, you will need to have regard for both. 

Other practical tips
Managing personal and business finances can often fall down the ‘to do’ list or seem so daunting, it feels easier to bury your head in the sand. However, good financial management does not have to feel like a chore if these simple measures are followed:

1) Record and understand your personal and business income and outgoings to ensure you are not overspending;
2) Identify which outgoings are discretionary (that is nice-to-have, but not essential costs) and which aren’t – consider whether discretionary spends could be reduced particularly when you are spending beyond your means;
3) Review all contractual costs such as utilities and insurance and negotiate/shop-around for better deals;
4) If the repayment of existing debt obligations is the difference between managing within your existing cash flow or not, than seek professional advice from a qualified accountant or a trusted business adviser as to how you might reschedule the repayment profile.

If you have exhausted the above steps and still feel you are unable to avoid overspending i.e. bring outgoings to within your income, then you should seek help. In relation to personal finances help can be obtained from either the Citizens Advice Bureau or an Insolvency Practitioner. For business finances help can be obtained from a qualified accountant or an Insolvency Practitioner. Virtually all professionals will give an hour’s worth of initial advice as to your options free-of-charge.

There are a myriad of options available to help restructure personal and business finances. We can help, please call any of us directly: