How to improve your credit score

0:01You know what I love, Damo? Things that save me time. You don't have YouTube Premium, mate, so I just don't believe that. Granted, I'll give you that one. However, I've got one for you. A great time saver in personal finance is Money Week magazine. They spend a lot of time distilling the biggest stories in personal finance down into consumable chunks, so you don't have to scroll and scroll. They give practical tips on savings, investments, pensions, the UK economy, the global economy. It's like your five a day, but for finance. If you want to give Money Week a try, you can get six issues in print and the app absolutely free by visiting moneyweek.com forward slash money.

0:34After your trial, you'll save an extra£5 a quarter on the subscription, which is exclusive to Making Money listeners. And that's moneyweek.com forward slash money. But there's a link in the description if you just want to click that. What is your credit score and how do you improve it? If you're getting a loan, for example, a mortgage or wanting to take out a credit card, then you probably want to be asking yourself these questions. But they don't make it easy to understand, do they? Even the phrase credit score can be used in different ways by different people. So today we're going to help you understand the information that matters to you.

1:07In this episode I use credit score to mean specifically the numerical score that credit rating agencies give you, that three-digit number you might have seen. And I use credit rating to mean how other organisations, particularly lenders, rate you in your credit worthiness. This could be your bank or a credit card company and it's primarily used to decide if or how you're going to be lent to. There are further nuances, of course, but to be honest, I really don't think it's helpful to go too deep into them here. So, yeah, here we go. Hello to me. Hello, Damien. How's it going? I'm all right, mate.

1:41How's it going? I was going to call you Timian. Why would you do that? Because if you ask Siri on my phone to call you, I have to say, call Timian. I always want to call you Tintin because of your hair. Ah, this guy. Thank you, mate. So on that note, should we get into today's episode? Let's do it. We've got a question from a listener called Simon. Thank you, Simon. It's not really a question. It's more of a statement. So I'm currently in the process of checking credit agencies. One of the big three agencies just didn't have a file for me. I just feel this stuff is much more important than people realize and it isn't taught anywhere.

2:12Discuss. I feel like GCSE English. So I guess today we're talking about credit ratings. Yes. Let's start by showing each other's. You show me yours, I'll show you mine. Not a competition I want to have with you, mate. We see who's going to win. Right. So I've got mine here. Mine's actually taken a bit of a hammering recently because I bought a load of stuff on credit, on debt. But I redid my studio and rather than shelling out the money myself, I put it on a 0 % card. So that's hurt me. Yeah. Pay for that tomorrow. Don't worry about today. Yeah. Yeah. I still reckon your score is better than mine though.

2:48I've got it here. Go on. So here's the big reveal. Mine is 781 out of a thousand and that's with clear score. Is that good? I mean, it's all right. It says here that the average in the UK is 555 out of a thousand. That makes me feel so much better because my score is 578 and that is classified as poor. And I'm not poor, but apparently my score is poor. You're not poor because you've been blowing all other people's money. Yeah, but I mean, I don't even have a credit card. So like, let's get into this because how is it I've got no credit cards, but I've got a bad credit score? Can we try and make you feel better first?

3:23Can we? Let's go around the room and ask some of the... Let's expose some people. Thousands of people that are in this room that no one else sees what their credit scores are. Who should we start with? I think we start with Jack. Jack, the cameraman. Yeah. 980 something. 980, what? Let me borrow some money and a credit card. What? What is going on there? That's insane. Guy lives with his nan as well. It's pretty much perfect score. Pretty much a perfect score almost. Ruth Ruth fled to Spain because she's got bad debts yeah mine 418 yes 418 below me that makes me feel a bit better yeah I know that makes me feel a bit better everyone at home is loving life at the minute I reckon Johnny you're looking very nervous mate mine's good 903 903 maybe Johnny and Jack yeah Johnny and Jack should be leading the podcast I'm upside down, that's a 600, 306.

4:24It's a hard 306. It's unbelievable. I've done that. Will is outraged. I've got loads of credit cards. She wrote loads of money in. So secret is get loads of credit cards. Be up to your eyeballs. And then pay them all on time. So what have you been doing? Not paying things. Well, if we break down into what affects your credit score. Don't forget Will first. Of course. Will, what's your score saying, buddy? 8, 6, 7, better. 8, 6, 7. So I'm the second lowest score. 867 wow yeah i appreciate you disappeared after matt done a runner yeah so first of all i mean what is a credit score so a credit score is almost like the number representation of what the agency that provides it to you thinks your credit worthiness is in the grand scheme of things it doesn't mean all that much you know people hold on to the score and what i actually think happened was the credit referencing agencies realized that they could sell an extra service direct to consumers where they go oh do you want to see what we think about you so all it is really is them saying this is how credit worthy we think you are and we'll rank that out of a thousand or whatever so you get to peek behind the curtain and see what they all i mean you don't know no you don't get to peek behind the curtain because what most people don't realize is most lenders will have their own criteria they they have their own criteria for making a judgment on so every business has a different criteria yeah every lender has a different criteria yeah you know barclays might say these are the things that are important to us and we run you through our own internal algorithm or process checklist the score itself vary from a like whoever you use to get the score so you i think you use i use experian yeah yeah so you know it bad is bad in any language I'm pretty sure, I don't think I'm going to go to 900 from 578 if I jump to ClearScore.

6:15There's a chance. So, you know, but yeah, bad is bad across the board. So is that the Experian? We've got Experian, you use ClearScore. How many are there? Experian, Equifax and TransUnion are the referencing agencies. They're almost like the big boys who make the scores, but then you have services that give you access to that. So ClearScore run off Equifax. I like ClearScore because it's completely free. and I think the user interface is nice. I think they make their money through then getting you to sign up to credit cards. And yeah, because they always recommend you different credit cards and things like that.

6:49But what you have is the three main referencing agencies and then lots of companies that will give you access to that score. You can even now get scores with lenders specifically. I know when I did a balance transfer recently, so I bought my studio on my American Express and then balance transferred the balance onto a 0%. So I get the points and the 0%. and within the NBNA or Virgin, it was, they were saying, would you like us to tell you how we score you? So lots of these places are offering these scores. Little extra, extra additional. And what kind of things can they see in your, what kind of things affect your credit score?

7:26So I'll tell you what, should we do a little quiz? I'll ask you first. Let's go. Yeah. Knowledge, wisdom, let's go. I'm going to go through, go through it. I've already given some of them away. So this is a quiz from the lender's perspective. So what the lenders know about you. so let's go through it if you have a criminal record can they see that oh that's interesting I hope not might explain your rock bottom score I have no criminal record for the record you plead the fifth I plead the fifth no comments you can speak to my lawyer I don't think that affects it what if it's for fraud oh good question there you go so I will say no they can't see your criminal record but if you've done something dodgy with money they probably can they think you can if there's potentially fraud yeah okay how about unpaid parking tickets No, they can't because otherwise I'd be on zero.

8:12Yeah. So yeah, they definitely can't. And energy providers and if you've switched? I have no idea. Well, probably if you don't pay them, if you don't pay your like gas bill, can they see it? Because that's, is that a lender? I don't think. Yeah, they could probably see energy providers. And what about how much you have in your savings account? No, because savings isn't credit. Okay. Right? Yeah. So do you not think though that maybe they might be like, oh, you're more credit worthy because you've got a load of money? I know they can see your bank account, like your main current account, but I don't think they can see your savings because they can't see investments, can they?

8:49Or can they? I don't think they can. It's your quiz, mate. I'm going to say no. I was going to pretend I know all the answers. I know, I hope you know the answers. I know, I'm going to read them off a sheet in a minute. No, they can't see your savings. Okay, fair enough. Okay. And how about all the shady videos you've been liking on Instagram? Frozen.

9:09I don't think, no, they can't see your social media. I can see those. Every time I comment on something, Damo's like, I've seen your comment. I was like, oh dear, I've been caught red-handed. It's funny, you see the weirdest video come up and then it's just T pops up as a comment below being like, what up? I like to engage with the Instagram community. Yeah, yeah, yeah, that's funny. Okay, let's go through this. But to be clear, we will just see a score from the lender's perspective, what they get is reams of data on you. So they get hundreds of lines of data. They know quite a lot about you basically as an individual and they can build a profile off that.

9:46Let's go through some of the things that they do have and then we'll go through some of the things that they didn't. Okay, cool. Okay. So they obviously have the application form. One of the key points around the application form is to make sure there's consistency. You know, if you're applying for lending, what people often do is they just bang down any job title and that might not match in other areas and they're doing fraud checks here and if they think there's inconsistency they'll be like no just just get rid they're looking to screen people out on that so make sure it's accurate up-to-date information those kind of things that can include everything from you know postcode salary family size any information that they've asked on there so they they can know quite a lot about you okay but they can't know like certain personal things right well they're asking that information i don't know if you've got kids and stuff well They're asking you to give that information, aren't they?

10:34So it's kind of like they can't search that up. They want to know it, but it needs to be accurate, I would say. Okay, past dealings you've had with that lender, obviously. So any credit you've had in the past with them, anything like that. And then your credit files through Equifax, Experian, TransUnion. So those credit files collect information from multiple different sources, like the electoral roll. This is why getting on the electoral roll is good for your credit rating typically. When I worked in debt solutions, the way this was always positioned was they like you being on the electoral roll because it shows you have roots.

11:14So it's like I'm registered to vote in this area. People who aren't, you're not settled. It just shows that you're kind of committed to an area a little bit and you're like formally recognized as living there from a voting perspective. I'm guessing there's data that if you're registered in a boat in an area, you're more likely to pay back the debt and things like this. Yeah. What else do they know about you? So we're still on the referencing agencies here. So the lender will go to the referencing agency and say, can we have all of the information? So they'll have like the electoral roll, court records, account history, typically for six years.

11:44So they can go back up to six years. When you say court records, criminal court or like financial? Good question. So more like CCJs and things like this, but fraud, yes, financial fraud, because I think that's relevant to the lending process, but I don't think that they can see criminal convictions. For our listeners, CCJ stands for County Court Judgment. Don't ask me why I know that. I might have collected a couple of these. You just love a day in court, don't you? I love a day in court, mate. No, don't turn up and then they hit me with the fines. Yeah, well, good point there. So if you have got CCJ action against you, most people don't attend the court hearing, you should go.

12:24No, I know. Because if you don't show up, they just go, oh yeah, well, they're not bothered, they're giving a CCJ. Student life, mate, it was student problems. Now I'm a good boy. Yeah. And then we've got the energy supplier. So there's some information there. I think in the recent past, they've added energy bills onto certain utility bills have gone onto your credit score. Or if you've switched suppliers, they can see that as well. Again, as well, if there's debt from energy suppliers that's gone to a CCJ, they'll be able to see that. So with your parking fines, they wouldn't be able to see the fine, but if the fine turned into a CCJ and there was a judgment against you to collect on that debt, they would be able to see that.

13:02And with those kinds of actions, they last for six years on your credit rating again. And it adversely affects your credit score, I'm guessing. Oh, yeah. There's not much - Are they bad? Yeah, pretty bad. Like really bad? Yeah, pretty bad. Before we go on to what they don't have, we'll just touch on this, because you've asked, there's kind of like a hierarchy of impacts on your credit score. But in my experience working in debt solutions, if you get any of these, you're going to instantly be subprime. So default notices are normally once you've missed three months worth of payments on a debt, they will write to you and send you a letter, a default notice to say you've defaulted on the debt, we're removing your ability to use it, and you now owe us the full balance back.

13:39So if you had a credit card with£1 ,000 on you, it's cancelled, you earn a grand. That default notice will last for six years on your credit file. If you pay it off within those six years, it shows us satisfied. All that simply means is you paid it off, but the default still stays there. Beyond the default, let's say you don't pay them and they chase you more and more and more and it goes to a debt collector. They can eventually take you to court and through the court process apply for a CCJ. And that's the county court judgment. That's an action against you. That is more severe than a default notice.

14:09Again, it lasts for six years. Everything does. but you know i i didn't experience lenders that were like we'll enter people with default notices but not to people with ccjs so they'll learn they'll just charge you more you're gonna struggle to borrow both really i mean that might have changed now i worked in this space 10 years ago the problem with the ccj is it comes with so a default notice and debt collection and things like this they they have no legal right to collect they can't come in and kick your door in and and take your stuff or whatever. Debt collectors, they just glorify call centers trying to get the debt.

14:44They normally buy the debt off the - Off the - Yeah, and try and collect on it. Whereas a CCJ, they can then appoint bailiffs and things. And these have much stronger rights for collection. The court has basically said, yes, you are owed that money. We also go get it. So the bailiffs and things, they're the more severe action. Beyond that, in terms of impact, are debt solutions like an IVA, bankruptcy, debt relief order, a trust deed if you live in Scotland. All of those are forms of insolvency. So they wipe debt. I often see adverts which are like, wipe your debt for£50. What people don't realize is they're basically going bankrupt with that solution.

15:24And that really affects your... Again, yeah. Worse than a CCJ. Yeah, because you basically, I mean, if you think about it from a creditor's perspective, if a person's got a default notice, you might think, well, maybe they hit hard times. If a person's got a CCJ, you're like, they've ignored it, but they're now set up a payment and they're paying it back. If they've gone bankrupt, you might be like, they just wiped the debt. So yes, they might have had a terrible situation, blah, blah, blah. But am I going to lend to someone that's just had all their debts wiped? view it through that lens lasts on your credit file for six years bankruptcy but the problem is a lot of lenders so mortgage applications will say have you ever been bankrupt?

16:02you know because they can't see past the six years but they want to know because I think so all lenders can only see six years six years of history so basically it's not fair to penalize someone for their whole life for past discretions otherwise I'd have been done in my 20s you know so they say six years to give people a fresh start. But then mortgage applications will say, have you ever been declared bankrupt? And if you don't say yes when you have, you could be argued that's mortgage fraud because you're lying on the application. And if they ever found out in the future, they could say, we're taking the product back.

16:35I just think it's important that people understand those solutions. The progressions of impact on credit rating, the whole thing will last six years or any of it really. But any solution that wipes debt off is a form of insolvency and is very serious. you know so anyway sorry we we segued there but while you were asking so yeah mate you got five years 11 months before your answer turns itself around unfortunately uh okay let's look at what the lenders don't actually know about you now then they don't know your race religion or ethnicity so i'm pretty obvious why they don't need that i mean with a name like tamena korely i'm pretty sure they could guess that i'm not caucasian yeah that's just a shout out but yeah um that's pretty cool that at least it minimizes people like i can imagine in the past there was some awful decisions made around race and lending and things like this yeah yeah we don't want to lend to mohammed or we don't want to lend to like yeah whatever so um that's pretty cool they can't see it who who you are married to or living with so they don't know who you're living with but they can if it's linked if you've got a linked account so one thing to consider is linked accounts can drag you down if you have like a joint bank account with someone who is reckless the association will impact you so the good association won't impact you but the bad association i mean the good one might might help um but you don't want to be the bad one drag down a school get a nice little balance in the middle yeah yeah yeah just average it out um so in the past when i had housemates we had like a me and me and a housemate we both rented a place and we had a joint account to just pay all the money into.

18:17And yeah, there was an impact there because when I moved out and stuff, they were still technically linked to them even though I hadn't been. So yeah, worth considering. They can't see into your savings accounts. Hey, I was right, told you. Yeah, because it's not relevant to the ability to borrow even though it is. It should be though. I always tell you, if you've got like half a mil saved up and you're like, I want a credit card. And they're like, oh, you can't, you've got bad credit rating. I'm like, yeah, but I've got loads of money in savings, but they can't see that. Well, you know they can't because they ask for proof of funds, don't they?

18:46But like, this is why a mortgage provider will ask for proof of funds and say, can we see that you've actually got the money and where that's come from? Like you say, it is relevant, but would you want a phone bill company knowing how much you've got in savings and stuff? You know, they can't see student loans except pre-1998, it says here. Again, no, unless you had a county court judgment for lack of payment. Criminal records. No criminal convictions are listed apart from fraudulent ones. Fraud, financial fraud. Makes sense. Yeah. They can't see council tax arrears, parking fines or driving fines.

19:22Oh, sweet. Says here that councils don't share data about your payment, whether it's good or bad. If you're in arrears, it won't affect your credit scores. I mean, that's interesting, isn't it? Yeah, because I still owe Manchester council from Salford, like money for my council tax. They're not getting it. I live in London, mate. Good luck with that. yeah it's so far away well now they've cancelled HS2 mate like no one's ever coming down again are they they're turning off the water next month as well they're going to spend it all on like a little new golden arch outside Putney tube station but yeah come up with this stuff yeah well that's how it feels if you're a northerner last time we recorded to me and you were having some real dramas with your accountant so how's that been going mate they're sacked so drama sorted they're a big corporate firm they didn't really replied to my emails very quickly, like took a week or two at times.

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22:25That's Vanta.com forward slash making money. There's a link in the description though, so you can just click that. is there such thing as getting such a bad credit score credit rating that you get blacklisted can you get can you get just like no no one's laying to you ever again you're blacklisted i'll tell you a story that we used to tell our clients when we were offering them debt solutions because people all the time would be like oh i don't want to be blacklisted this is probably complete bs but it sounds good so it supposedly comes from a time when the high street and people would go to the butchers and then the green grocers and things like this and they would buy their food on tick or credit you know yeah they would get they would say here is you can have your week's worth of meat come and pay me on friday and people that didn't make that payment they would write their name on a blackboard and put it in the window and that was the blacklist so the other shop owners on the street could see that and go oh that person we're not gonna lend them sweet corn or whatever because they've not paid the meat man back.

23:25So that was the blacklist. Where this gets convoluted even further is it is public information if you've been declared bankrupt. It's still printed in a couple of newspapers. I can't remember the specific one, but there's a London newspaper that prints everyone who's been declared bankrupt. And you can search up the records, the insolvency register it's called. And on there, you can see everyone that's been declared insolvent so there is no blacklist and yes there are people that can borrow during bankruptcy even though you shouldn't this is why a lot of people get into trouble where you know they've they've been declared bankrupt and then they're found to still be borrowing and things yeah so but there's no like oh this person has been condemned no one should lend to them we always used to say to people before we were making them insolvent you know a credit rating is only good if you want to borrow but that is true in a way but it's not so there's a lot of people out there that might be sat there going you know i don't want a credit card i don't want a mortgage so a credit rating is used to get credit right but first of all if you're borrowing a good credit rating will allow you access to better rates longer interest-free periods on cards better balance transfers things like this you'll get the better products.

24:42You've probably seen it when you go on and you do a comparison and it will offer you an advertised rate. And it'll be like, you could get 5%. You click it and then it's like, nah, 55. That's because they've taken a look at your rating and gone, yeah, this guy's a melt. Whack up the rate. You know, so it impacts that side of it, but it can also impact jobs. so I worked in certain professions where I had to be credit checked I actually had that yeah with um non-in investments and finance yeah it was an American finance company and they wanted to know and he did a whole criminal record financial record and then they wanted to know because you like you're likely to commit fraud yeah that is the argument if you're in bad if you're in a bad position I guess and there's also you know when I worked for it was it was like a property investment company the argument was that they needed the people to be clean because if the client base looked up who was working with them and and things like this so they might you know a company might screen you on that basis which can seem unfair but you know it can affect certain job positions that's interesting um what about if you have like loads of credit cards does that affect your credit score if should you have like if you're if you have credit cards you're no longer using like old credit cards do you still keep them active or do you destroy them like how does it so we're getting into now what impacts the score or the rating yeah and what what so the score is up to the lender and they might say we don't like people to have more than one card but sorry the rating but let's talk about the score specifically and the information that they use to consider it because that kind of gives a nod to the the rating side of it what you talked about there was something called credit utilization.

26:28So this is what percentage of your debt are you using on a monthly basis? And it's kind of counterintuitive this because let's say you have£10 ,000 worth of credit cards total. So you have three cards each with£3 ,300 limit, you could spend£10 ,000. What they want to see is a low utilization on a monthly basis. They want to see that you're not spending up to the limit all of the time and that you're paying that off. Or if you're holding a balance, so you've not paid it off in full each month, that it's not right up to the top. Being up to the limits on cards signifies to the lender that you're struggling.

27:07So they recommend a utilization below 30%, but you'll see improvements in your credit score as you pay off debt and you get closer to zero. Now, because the utilization is a percentage of the total amount of credit that you have available to you, by having more access to credit, you can actually have bigger balances, but a better utilization. So for me, for example, if I owe£10 ,000 on one credit card and it's 10K limit, that's 100 % utilization. But if I have four credit cards each with£10 ,000 and I still owe£10 ,000, I'm only using 25 % utilization. So they would see that as better because I'm not maxed out.

27:50so when you get your credit score they'll often say improve your utilization and you'll find that if if a new card is added onto your credit file that can actually mean your your score improves because the utilization drops because you're using less of the available credit it's like this guy's got the ability to blow 50 grand at any point and he's only spent five yeah so that must mean he's relatively sensible so i never really close down old credit cards if i'm going to close down a credit card I'll close down the newest one because the age of the account also factors into the score so it's better if you have longer it's a longer standing relationship with a with a provider it says signifies to other lenders that this person has been with that provider for a long time they've been with their bank account for 15 years they've kept them happy so you know whereas if it's like oh this guy's got nothing but new credit cards they're all a month old what's he about to do you know I mean he's about to have a the time of his life that's what I did in Israel Okay, I'm just watching this back.

28:52And before T tells us whatever he got up to in Israel, I just want to add something in here. T asked me whether he should cancel old credit cards. Now, whilst what I said about credit utilization and longstanding relationships is right, it's also true that having lots of unused credit cards can negatively impact your applications. So if you have a range of unused credit cards, then it could be a good idea to cancel some of them. There is no definitive answer here as all lenders look at this differently. But in general, if you've got loads of unused credit, close some cards down, leaving the oldest ones open.