'I'm an finance expert – use January to boost your credit score and save big'

Almost two-thirds of people in the UK don’t fully understand the impact of credit card behaviours on their credit score, new research shows.

While nearly a third (31 percent) of people said they have a “strong” credit score, nearly one in five (18 percent) are unsure what their credit score is.

The data, compiled by Compare the Market, follows the site’s latest Money Action Index that found three quarters (76 percent) of households with children at home using credit cards struggled to pay off their monthly balance in the past six months due to rising living costs.

Jonathan Such, head of sales at First Response Finance said: “Failing to understand the weight of your credit rating can significantly impact your wellbeing and limit your opportunities, which is why it’s fundamental you gain a clear understanding of what it is and how you can improve yours.

“Admittedly, it can be a complex concept made worse by conflicting opinions, advice, and beliefs. On top of this general confusion, we’re also dealing with a cost of living crisis in a post-pandemic world. No one can blame you for feeling a little overwhelmed.”

Considering this, Mr Such delved into the basics to help people start the year off on the right foot.

What is a credit rating?

Mr Such said essentially, a credit score is an evaluation that predicts a person’s ability to pay back a debt.

He explained: “Each time you borrow money, such as receiving a bank loan or purchasing a product using finance options, this information is logged and how you respond to the debt is monitored.”

Credit agencies, such as TransUnion, Equifax and Experian, then work with the likes of banks, mobile phone companies, and other major retailers to help these businesses determine whether the person applying for credit is likely to pay it back.

Mr Such said that while each agency has its own scoring system, and will therefore produce different scores for the same person, they consider the same factors.

These typically include:

• Payment history
• Credit utilisation
• Length of credit history
• Types of credit used
• New credit applications.

What is a poor credit rating?

A credit agency will give someone a low (poor) credit score if they have a history of failing to pay their bills on time, or if they owe too much money.

Here’s what each agency classes as poor:

• Experian: 561–720 points
• Equifax: 280–379 points
• TransUnion: 601–660 points.

Mr Such said: “The impact of a low credit score rating could be detrimental to your quality of life and significantly restrict your financial opportunities. Consequences could include difficulty in obtaining loans or credit, higher interest rates, and limited access to financial opportunities such as credit card options.”

Common reasons for poor credit ratings include late or missed payments, high credit card balances, and too many credit applications.

Mr Such said: “Some personal debt is normal, especially in young families or small business owners, but it’s how you handle that debt that can determine what your financial future looks like.”

How to improve a credit rating

If a person’s credit score isn’t quite what it should be, Mr Such said: “Don’t panic! There are steps you can take to ensure you improve your rating at a steady speed and enjoy all the benefits that come with a good score.”

Listing a few things to try, Mr Such said people could pay all their bills on time; pay off credit cards; maintain a diverse credit mix; or limit new credit applications.

Mr Such said: “It’s not the end of the world if you have a bad credit history, but it can make things unnecessarily difficult.

“For example, First Response Finance offers clear and simple vehicle finance agreements even for those with a poor rating.”

However, to avoid disappointment, Mr Such suggested: “Start taking the necessary steps to improve your credit score today. It’s never too late to give yourself the best possible start at securing credit in the future, even if it’s something you don’t think you need right now.”

Seek professional help if needed

Those who think their credit score is beyond repair using the above steps can enlist professional help. Free, confidential, and independent advice on dealing with debt problems is available through charities such as National Debtline, Citizens Advice, and StepChange Debt Charity.

Mr Such said: “This should make improving your credit score a whole lot easier, which is the best outcome if time is of the essence, and you need to move quickly. There is absolutely no shame in asking for help if you need it.”