Martin's Masterclass to...
Protect & boost your credit score, as the cost of living crisis bites

Crucial for mortgages, credit cards, loans and more

The financial squeeze is on, and as I explained in my financial cataclysm warning video last week, it's only to get worse. As costs are rising faster than incomes...

→ you have less disposable income
→ that makes you less attractive to lenders
→ so acceptance, especially for cheap rates, is tougher
→ which adds to your costs... now rinse and repeat.

This applies to anyone who wants to balance transfer credit cards, get a loan, mobile phone contracts, bank accounts' acceptance and more.

The best example is the risk to cheap mortgages...

There are two main lender's checks - affordability and credit. The affordability check is the one most impacted by the cost of living, and it's tough to improve, especially if you've already cut back to the bone.

So far, most mortgage holders have been protected from UK rate rises as they're on fixes. Yet millions of these end this year and next. And the best new cheap fixes now cost near 3% (back in Oct, they were under 1%).

Worse, many who only just passed affordability checks before may now struggle to get a new 'cheap' fix when their current deal ends - leaving some locked to their existing lender, or paying higher rates, or having no choice but to go on the expensive standard rate.

That's the reason the credit check is so important, as it may tip the balance. Of course, it'll be hit too if you've increased borrowing to cover cost-of-living increases. Yet as you may be able to polish your credit score, it's worth the effort, so this week, here are my credit scoring need-to-knows:

1. You don't have a universal credit rating or score, and there's no blacklist. Unlike some other countries, there's no such thing as a definitive credit rating or score in the UK - no one single number that dictates whether a lender will accept you (and if you've been told there is, see point 4 below).
   
   Instead, EACH lender scores you differently based on its own wish list of what is a profitable customer - usually profitability equates to risk, but there can be specialist lenders who view it differently.
   
   
2. Your CREDIT REPORT is the key, check it for errors at least once a year, or before any application. There are three main consumer credit references agencies. Each compile a report (also called a credit file) about your credit history, and lenders use those when they assess you.
   
   So if you'll ever need credit, check them regularly, and do it line-by-line. A simple error, such as an unused - but still open - credit card account listed at the wrong address, can kibosh applications. Even if the file is correct, checking helps you spot problems.
   
   How to check credit reports for free... it's best to check all three as they can differ, full help in Free credit reports, but in brief:
   
   - EXPERIAN (the biggest): Use MSE's free Credit Club
   - EQUIFAX: Use Clearscore*
   - TRANSUNION: Use Credit Karma
   
   PS: For Clearscore and Credit Karma, members of cashback sites may get paid up to £13 for checking.
   
   
3. Do you know what they know about you? Lenders assess you based on three key pieces of info:
   
   i) Your credit report, as above, which includes electoral roll info, products you have, court judgments & more.
   
   For what they do and don't know about you, eg, speeding points, criminal records, missed payments and more, see the full list of What credit reference agencies know about you.
   
   ii) Any past dealings you've had with them. So a lender you've banked with knows you better - sometimes good, sometimes not. If it is good, applying there can boost acceptance.
   
   iii) Your application form. This has crucial information on it, including your salary (which credit reference reports don't have).
   
   
4. Don't get too hung up about your 'Credit Score' number - it doesn't mean too much. I get many worried messages like: "My credit score has just dropped 12 points because I did x, y or z. Help." Yet little changes in your score mean, well, very little (big moves are worth following up though).
   
   That's because the 'Credit Score' you're given by a credit reference agency isn't used by lenders, it's just a consumer product sold to give a loose indication of how a 'typical' lender may see things, based only on your credit file.
   
   But every lender is different, with its own, usually unpublished, scoring system, based on its preferences, and including the data from your application form and their relationship with you too.
   
   For example, if you close a credit card and your score rises, that's one interpretation, based on the fact you've less credit, but some lenders may score you down for it, as they like signs of longevity. It's not hard and fast.
   
   So while the 'Credit Score' is a loose, useful indication of how you're doing, it's far from gospel, so don't stress small moves. Though it isn't bad to get a free credit score or get paid £9 to do it.
   
   PS: From here on, when I mention credit scores, unless stated, I mean lender's own, not the ones from credit reference agencies.

5. Don't ever apply on spec, always first home in on where you'll be accepted via an eligibility calculator. If you need a new product, you want to aim to do it in a way that best protects your ability to get future credit. So applying, then getting rejected and applying elsewhere is a nightmare.
   
   These days, to help some lenders have eligibility checkers to show your chances before applying. Better still, use tools that show which of a big range of top products you've best chances of getting. Some of the MSE eligibility calcs include:
   
   - Cheap loans (lowest cost personal loans)
   - Balance transfer credit cards (shifting existing debt to 0%)
   - Spending credit cards (new 0% borrowing)
   - Balance transfers AND 0% spending cards (2-in-1 cards)
   - Money transfer credit cards (paying cash into a bank at 0%)
   - Reward credit cards (cashback, points, spending incentives)
   - Travel credit cards (cheap spending overseas)
   
   What if I only get a low eligibility chance? Don't immediately be put off. A 20% chance means two in every 10 are accepted - you may be one of the two. So if your best chance is 20% and it's a product that's crucial, go for it, some will be accepted, the worst result is just one search on your file. It's worth it.
   

6. You can snog or live with who you like, just be careful if you get joint products with them. It doesn't matter if you hold hands, snog, live together or even get married, none of those things will link your credit file with someone. Yet a joint mortgage, loan or even joint bills bank account with flatmates usually will.
   
   That means lenders can see their history when you're assessed, so if you get together with someone with a bad history, avoid joint products if you can.
   
   No longer with someone you were linked to? See how to de-link your finances.
   
   PS: There's no such thing as a joint credit card, the other card is just a 2nd card on the first account, so it doesn't link you.
   
   

7. Your Credit Hit rate is a truer indication of your credit-gaining powers. As I mentioned, my biggest issue with the credit reference agency's Credit Scores is they miss any indication of affordability scoring. So about six years ago, I came up with a Credit Hit rate measure, from our free Credit Club. It is a more real-world indication, showing the percentage of top deals you're likely to get. Do have a play (it doesn't include mortgages though).

8. You need to have credit to get credit, but there is a way to build or rebuild your creditworthiness. As my quiz above shows, those who've a bad history get rejected, as do those who've never had credit due to a lack of data on them. So you need to find a way to break this catch-22.
   
   The easiest way is a 'poor credit scorers' credit card. Use our Credit (Re)build Eligibility Calc to show which cards you can get, but as they have very high APR interest rates, follow my ABC of what to do:
   
   A) Use it for £50ish a month of normal spending (no ATM withdrawals).
   B) Always repay IN FULL each month, so there's NO INTEREST (as you only pay interest if you've a balance left). For safety, do this by direct debit if you can, as miss it and it can make things worse.
   C) After 6mths to a year, you'll start to look a better credit citizen.
   
   PS: The Tesco Bank Foundation card* (best to check acceptance odds first) is a poor credit scorers card that also gives you Clubcard points on spending, so if you can get it, you may as well plump for it (do pay it in full or it's 27.5% rep APR). More options in Credit cards for bad credit.
   
   

9. Don't be scared if you see the fact you've checked a file or used an eligibility calc on your credit report. There are two types of searches firms do. Most applications are 'hard' searches, which'll usually appear on your file whenever you apply for a credit product.
   
   Yet when you check your credit file or use an eligibility calculator, a 'soft search' appears there. That means while you see it on your credit file, lenders DON'T, so it has no impact.

10. Get unfair defaults removed from your file. If there's a default on your file that isn't fair (eg, you were marked as paying late, even though you paid on time), it's important to get it removed - or it can kibosh most future applications.
    
    It can be tough to get rid of, so see our step-by-step unfair defaults help. And even if it's fair, see how to mitigate the damage from defaults.
    

PS: And it's goodbye, for now, from me. For the next few weeks, I'm taking a work-break to focus on being a daddy, a husband and recharging my batteries (though I'll be back for the price cap announcement) as there's a scary autumn and winter coming and I want to be on form to be able to help. The site and email will continue to flourish in the overly capable hands of the MSE team. Ta-ta.