How Do You Improve Your Credit Score for A Loan in the UK?

Credit scores are paramount to borrow money as they throw light on your payment behaviour in the past. Three agencies in the UK – Experian, Equifax and TransUnion – record data on your loans and have their own system of calculating a three-digit number called a credit score, known for influencing the interest rates charged to you.

When your credit rating is not stellar, you will be imposed a higher interest rate and vice-versa. Although there are chances to get the nod for a loan despite a poor credit score, interest payments can make your budget very thin. In some cases, the loan could be so expensive that you may end up rolling over the loan.

Therefore, you should try to do up your credit report. Not only will this improve your credit rating, but it will also let you borrow a larger sum, such as mortgages and auto loans, at competitive interest rates. Here are the tips to improve your credit score:

• Check your credit report

As you do not know which agency your lender will contact to get your credit report, you should get a copy of it from all agencies, especially before applying for a loan. Apart from the status of your credit rating, you can also get to know if there are any discrepancies accountable for taking a toll on your credit score.

You could fall prey to identity theft, meaning someone could have been withdrawing a loan application in your name. Agencies can also miss important information, resulting in a bad credit score. If you spot any of these errors, you should immediately get them fixed. It will take at least a month to rectify wrong entries.

Checking your credit report will not pull your credit points. A free copy is available only once a year. During the rest of the time, some fees will be levied.

• Borrow carefully

What pushes you into a debt cycle is throwing caution to the wind while borrowing money. Just because you can get approval for a certain sum of money does not mean that you can actually afford to pay it back. The lending decision is made by AI, which, contrary to popular belief, can be biased to draw conclusions about your repaying capacity.

Giving an excuse for flexibility, the lending industry does not ask explicit questions such as age, gender, or expenses, nor does it ask for sufficient proof to show your repaying ability. Unfortunately, its impact is seen when the loan becomes due, and you find yourself running out of pocket. This leads to a loan rollover. The amount quickly adds up, and you cannot make a break for it.

You will bear the ultimate repercussions, so you should carefully estimate your repaying capacity while applying for bad credit loans from direct lenders. To be on the safe side, borrow less than you need.

• Take out credit builder loans

Some lenders provide credit builder loans mainly aimed at subprime borrowers. These loans are instalment loans that last for up to six months. You will pay down the debt over a period of six months, and your lender will report those payments to credit reference agencies. This new record will leave positive footmarks on your credit file to give your score some boost.

Be prepared to bear high-interest rates as these loans are quite expensive. Do not use these loans if you are not sure about your repaying capacity.

• Look for ways to get an instant credit boost

There are a few lenders that provide small personal loans to subprime borrowers to help them build their scores without further ado by offering lower interest rates.

The debt will be paid in 4 to 5 instalments, and each instalment will contribute to your score by 25 points, for example. Look for these lenders and contact them to get an instant boost. They are way cheaper than credit builder loans.

• Lower your credit utilisation ratio

If you have a credit card balance, try to pay it off as soon as possible. Even if you have a thin budget, you should try to pay more than a minimum balance, as this reduces the accrued interest. It is suggested that you do not have a balance of more than 30% at a time. The lower, the better.

Draw a strategy to get rid of credit card bills and then use it only when it is very urgent. Try to apply for a credit builder card.

• Borrow only for emergencies

Borrowing cannot be cheap and a good alternative to your savings. So, try to build an emergency cushion for unforeseen expenses. If your savings fall short, you can borrow from a direct lender in the UK.

However, you must identify the difference between needs and wants. For instance, if you can put off the purchase, do it. Moreover, loans should not be used to fund impulsive purchases. Spend money sensibly so you do not run out of it to meet essential expenses.

Create a budget to keep track of the ins and outs. Use a budgeting app to keep tabs on your expenses. Review your spending periodically so you do not get any ugly surprises at the end of the month.

• Avid multiple applications

Whether your credit score has improved or is in progress, you must refrain yourself from filling in multiple loan applications. Too many applications indicate that you are struggling with money lowering your chances of getting the nod. Further, multiple queries will make your score worse.

The bottom line

Your credit report must be healthy if you want to borrow money at the best interest rates. Try to lower your credit utilisation ratio, use a credit builder loan, borrow carefully, spend sensibly and access ways to boost your credit rating immediately.

The journey of fixing your credit score can be long but stick to your goals to see a positive impact on your credit rating. If your efforts are in the right direction, they will not go down the drain.