When you set up any kind of credit agreement; be it open a bank account, take out a new phone plan or take out any kind of finance, your credit history will be checked. But what is a credit history, score and how can you change it? Read on to find out more.

What is a credit history?

A credit history is an overview of how you currently and in the past have used credit, both in terms of borrowing and repaying.

Your credit report will not only show existing and active agreements and information, such as bank account, credit cards, loans, other agreements like phone plans and store cards; but also includes your current address, past addresses, past applications and closed accounts, and an insight into who else has run a check on your account in the previous two years. The degree of the checks made by the lender and the information that ultimately comes up under that check, depends on the level of search they do; soft or hard.

Your credit history will also show if you have defaulted on any agreement or have been made bankrupt at any point.

What is a soft search vs. a hard search?

A soft search means that this type of search will not show up on your credit history, nor will it impact your credit score; yes, even searches on your credit history can impact your ability to secure finance (see below for more information). A soft search will only provide an overview; like confirming your identity and the information you provided and whether you are likely to be eligible for the product/service/offer you’re seeking. A soft search is often carried out as a perquisite to a hard search to see if there is any obvious red flags.

A hard search, on the other hand, means they will be pulling up the full breadth of your credit history.  Additionally, this type of search will leave an indicator on your report for 2 years and potentially affect your borrowing ability in future. It can call into question any rejections for applications you’ve had, or lead to a rejection because of multiple applications in a brief period of time- yes, this too can affect your borrowing power.

How is your credit score calculated?

Are paid bank accounts worth it?

Annoyingly there isn’t one ultimate score. In fact, your credit score could be different, depending on which company provides the result. But, generally speaking, your score is determined based on how many accounts you have, the types of accounts you’ve had (e.g. the types of lenders you’ve borrowed from), how you utilise your credit (the amount available, vs. what you have allocated) and the breadth of history.

It’s true that if you don’t have an extensive credit history – a proven ability to borrow and repay money- you can be rejected for an application. So, it’s not beneficial to forgo credit altogether. If you want to be able to obtain a mortgage or a substantial loan in the future, you will need to ensure there is enough information there to provide a good indication to a lender the type of borrower you are.

How to check your credit score

Most credit score providers do offer a free trial service to download your credit history in full. But bear in mind this would be considered a hard search. Though, this is no bad thing if you don’t have any expectations to borrow or need to run substantial checks on your account in the near future.

Looking at your credit score from time to time, evaluating areas for improvement, can help to improve your borrowing power. This can not only benefit you in terms of volume of credit available to you (earning dependant of course), but also the rate at which you borrow.

If this is something you want to stay on top of, consider signing up to the Money Saving Expert Credit Club which is run in partnership with Experian. They’ll able to tell you your current credit score and highlights some ways in which you can improve your credit rating. They’ll send you an update each month so it’s never been easier to stay on top of financial situation. It’s also beneficial to know that this type of search is a soft search so won’t cause an impact to your creditworthiness.  

How to change your credit score

As mentioned, your credit score not only impacts the amount of borrowing you’re eligible for but it also can impact the rate at which you can borrow. Generally, the better the score you have, the better the loan terms.

If you want to look at improving your score, below are just some of the ways you can do that. It’s important to note that there are no quick fixes when it comes to your credit score. It may take several months for it to reflect on account. So, the more you keep up to date and on top of it, the better your financial position.  

Close down inactive accounts

You may find that you have active accounts that have not been used in sometime, e.g. store credit agreements you may have used once years ago. Although it’s seemingly harmless, this is regarded as credit that could be accessed at any time. As such, it’s good practise to close down any accounts as and when you’ve finished with them or you’ve found you’re not using it as much or at all. This can help to reassure lenders and open up more opportunities to for you as and when you need it.

Reduce your borrowing

One of the things we’ve indicated in this article is if you are utilising a lot of your available credit, this can indicate to lenders that you’re reliant on your credit, with concern that you’re stretching yourself financially. Based on your affordability this may not pose an issue at all but when looking at this picture, financial experts recommend, particularly with credit cards, that your utilisation should be at 30% or less. So, by reducing your dependency on credit you can help to improve your credit score.

Avoid too many applications

The key thing here is in too many applications in a short period of time. Soft searches will leave no footprint, whereas hard searches will leave a trace on your account for up to 2 years. Therefore, if you’re taking out any applications, whether moving home, opening bank accounts, taking out a loan etc. be mindful of the type of search they’ll be carrying out and how this could impact you in future.

Build a credit history

You can actually be flagged for not having many past examples of borrowing. Lenders need to see that you can repay on time and complete an agreement. There are also good and bad examples of borrowing. Although a phone plan leaves a mark on your account, it isn’t regarded as a good example of your ability to borrow and complete an agreement. So, it can be helpful to have some strong examples such as loans and credit cards. Additionally, you need to ensure your address information is up to date, you manage your utilisation responsibly and you make regular payments.

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