Dear Monzo,
For the best part of the last 20 years, I’ve been in credit card and loan debt which generally floated around £16,000 to £18,000 and spanned 11 credit cards, two loans and two vehicles on finance. I’d never missed a payment on a single card or loan, ever, though I was making only the minimum payments.
My credit score with Experian, Equifax and others was good. Surprisingly good, actually. It was towards the very top end of the “excellent” range (I was almost a perfect 999 on Experian).
In June 2018 I landed a new job which more than doubled my annual salary, which meant I had more than £1,000 a month of surplus money. So I decided to make a real effort to clear down debts and close my credit cards and loans.
As of this month, for the first time in my adult life, I’m completely and utterly debt-free! Which is a feeling I can’t really describe. I’ve gone from 11 credit cards down to one. All my loans are paid off and closed, and the finance on my car and motorbike are clear.
But the problem is my credit score has never been so bad! A lot of credit reference agencies are reporting my score to be around the “fair” to “good” mark.
This year I’m concentrating very heavily on saving for a mortgage deposit. And by the start of next year, I want to look at buying my first home. But now I’m worried that my score won’t recover. Or that I’ve done something wrong somewhere, somehow and lenders will snub me.
Will my credit score recover?
– Confused about Credit Scores, via email
Dear Confused about Credit Scores,
Your letter is inspiring! Getting out of debt, not least believing you can, requires Olympian levels of determination and self-discipline.
To get yourself debt-free, it sounds like you’ve done something incredibly sensible (but difficult!), and kept your lifestyle roughly the same even though your salary doubled. As we earn more, I think it’s all too easy to grow comfortably into a new income without really realising. You have more cash in your account, but somehow, without noticing, your tastes and lifestyle adapt and you don’t feel any richer. You’ve resisted this, and used your extra income to put yourself in a better position. So much so that you can now start thinking about saving.
So I’m not surprised that you’re incredulous about the implication that you’re now a less desirable customer than you were when you were in debt!
As I’m sure you know, your credit profile is important and its consequences far reaching, from being able to get a contract for your phone, to being able to buy a flat.
But I’m yet to meet anyone who can really demystify credit scoring. Those in the know tend to say “it’s an art, not a science.” Which helps no one! But there do seem to be some loose rules to follow.
First, I think it’s worth explaining that you don’t have one single credit score. The myth that you do adds a lot to the confusion.
Every lender will have their own way of scoring you. But they usually won’t tell you exactly what this is. Broadly, they’ll base their scoring system on information about you and any previous financial dealings that are visible on your credit file.
A credit report contains information about how you’ve managed money in the past six years. You have one stored with three credit reference agencies: Experian, Equifax and TransUnion (formerly Callcredit). Each of these agencies will give you a score, but you should only take this as a guide. A lender might come up with something totally different. Although again, frustratingly, you’ll never really know. You’ll just be accepted or rejected.
I’m a bit cynical about how some banks might decide whether or not to lend. In their eyes, maybe you used to be a more desirable customer when you were in debt because you were more profitable. Customers just clearing minimum payments make banks a lot of money in interest.
The less cynical response is that not being in any debt means lenders can’t see whether you can pay back money you owe on time. And that means they don’t have enough information to confidently conclude that you can borrow money and pay it back when you’re meant to.
So far, so complicated. To try and clear things up, I asked the credit reference agencies about your conundrum.
Credit Karma, which lets you check your TransUnion score, says,
“Having high or low levels of debt can affect your credit score, but it’s often more complex than this. A bigger determinator of whether you’ll have a good or bad credit score is the way you manage your credit agreements. Despite using quite a lot of credit in the past, it looks like you were crucially, keeping up with repayments on time.
“You were, therefore, showing signs of good financial management, which can positively influence your score. Anyone that keeps on top of their repayments, paying them off on time and in full each month, is more likely to have a better credit score.”
Experian agrees.
“Keeping the old cards open with zero balances would have been the ideal scenario for credit scores. It looks like you’ve inadvertently left your active credit history somewhat limited.
“Credit cards are particularly powerful in terms of credit score factors. Long-running card accounts with a perfect payment history, low balances and high limits will gain lots of points on Experian’s scoring system.”
Equifax has a slightly different take.
“Paying off more than the monthly minimum on credit agreements to help keep credit balances low indicates to lenders that you’re able to manage your existing credit commitments. Settling debts in full also helps to demonstrate your ability to repay debts.”
Equifax also says that if you have cards you’re not using, you might want to close some of them. They say lenders will often look at the total amount of unused credit you have available, and consider this when deciding how much more to lend to you. This applies especially if you want to get a mortgage. If you have large credit limits, it looks like you have the potential to borrow a lot of money, which might put some banks off offering you more.
Based on what the credit reference agencies have said, it seems like having one or two credit cards or loans that you repay regularly (ideally in full) without maximising the limit, is a fairly safe way to boost your score. But understandably, you might want to steer well clear of any debt after working so hard to get out of it.
Luckily, there are some other options to boost your score.
1. Add your rent payments to your Experian credit report
One of the best for prospective first time buyers is to add your rent payments to your Experian credit report, which you can do through a company called Credit Ladder. This can help demonstrate that you’re capable of paying bills on time and in full every month.
2. Correct anything in your credit file that isn’t accurate
You should also access your credit file and check everything on it’s accurate. If you find anything you don’t think’s quite right, you can add a notice of correction. This is a little note you can write to explain why you think the entry’s wrong or shouldn’t be taken into account.
3. Register to vote at the right address
Make sure you’re registered to vote at the same address you’re using to apply for a loan, as this is the information a lender will use to check you are who you say you are.
4. Break financial ties with your exes
And if you have any financial ties to ex-partners or ex-flatmates, like old joint accounts, disassociate yourself.
Most of all – don’t worry too much about your “good” and “fair” scores. As long as you don’t slip into “bad” territory, your scores shouldn’t impact your ability to get a mortgage if you carry on managing your money as reliably as you are.
Good luck!