The Ultimate Guide to Fixing a Bad Credit Score

Updated: March 21, 2024 Author:

Key takeaways:

  • A bad credit score categorizes you as high-risk to lenders
  • In the UK, there are three primary credit reference agencies providing credit scores
  • Credit scores differ across agencies, but the overall rating trend is consistent
  • A score below 40% of the maximum at any agency is deemed poor
  • Credit scores reflect various factors, including debt management skills
  • Your credit score can improve over time with appropriate actions
  • It’s possible to obtain a loan with bad credit by approaching the right lenders

    Think of your credit score as a representation of your financial health. Simply put, it’s an assessment of your money management skills based on your ability to repay your debts as well as other financial and personal details.

    It’s one of the key factors that banks and other lenders will consider when giving you any kind of loan or finance. So, a bad credit score significantly mars your chances of securing personal and business finance as well as of getting a mortgage, car loan, and even credit card.

    What is a bad credit score?

    In a nutshell, a bad credit score suggests that you have had a problem handling the repayment of debts. So, when you apply for a loan with poor credit, the amount offered to you will be restricted to a certain range.

    Similarly, when you seek a loan, the interest rates offered to you will generally be higher as financial institutions deem clients with poor credit ratings to be high-risk borrowers.

    In the UK, your credit score can come from one of three main credit reference agencies (CRA): Experian, TransUnion and Equifax. These agencies use different scoring systems, so the actual numeric credit score will vary based on who is providing it.

    However, you are unlikely to find discrepancies in your credit rating band among agencies. So, if Experian places you in their poor credit band, you will also have a poor rating from the other two CRAs, although the numbers will differ.

    As a thumb rule, if a person’s credit score is in the vicinity of 40% to 50% of the maximum rating, it is considered poor, while a score above 61% of the maximum but below 70%-75% is considered fair.

    The “fair” band is what could be considered the average rating or at least the rating that the maximum number of people have. You find yourself in good and excellent bands when you go above this range. For instance:

    Experian has a rating range of 0-999. So, a score in the range of 0-560 is very poor, while a score of 561-720 is poor. The fair range for this CRA is between 721 and 880, and anything above 881 is considered good.

    TransUnion has a range of 0-710. So, with this agency, a rating of 0-550 is very poor while 551-565 is poor. You get to the fair band in the 566-603 and move to the good and excellent categories once you pass 604.

    Equifax recently moved to a rating scale of 0-1000 from their previous range of 0-700. They also changed their credit rating bands, phasing out the “very poor” range. So, as of 2022, a score below 438 is considered poor, while being in the range of 439-530 puts you in the fair category. A rating of 531 to 670 is considered good; above that, you climb into the very good and excellent categories.

    How are credit scores calculated?

    CRAs don’t assign a bad or good credit score to you. They feed your financial information and other personal details to software. The program then comes up with a numeric value by assigning different weightage to the information provided.

    At least at this time, neither banks nor CRAs offer information on the actual weightage of specific financial data points that lead to the final score assigned to a person. But, the factors they consider include:

    • The amount of money you owe
    • Instances of missed and late payments
    • History of exceeding your credit limit
    • Amount of your debt as a percentage of the total credit limit available to you
    • Instances of default on credit agreements
    • Number of address changes
    • Number of credit applications
    • Number of cash withdrawals on credit cards
    • History of bill payments
    • Insufficient or low balance in bank accounts
    • Credit history of persons with whom the subject has a joint account
    • Absence of your name in the electoral roll
    • Errors in credit histories
    • CCJ’s & Bankruptcies

    How can I check my credit score?

    1. Experian: Because Experian is the largest of the 3 main CRAs, you might want to approach this agency first to check your credit score. Although they don’t charge for providing access to your credit score, you must register on their website.

    Your credit score and your credit report are different from each other. While the first is an overview of your financial footprint, the second is an in-depth financial health analysis. If you are going for the latter, Experian offers it to you for free for the first 30 days if you register for their paid CreditExpert service. After the trial period, they charge £14.99/month for the service.

    2. Transunion: This is the second largest CRA in the UK and, as such, an agency that lending institutions approach almost as frequently as they do Experian. Credit scores from TransUnion can be checked for free through their Credit Karma service (formerly known as Noddle). Another way is to use CheckMyFile, which provides credit reports from TransUnion and Equifax for free through a 30-day trial period. After the trial period, they also charge £14.99/month for their services.

    3. Equifax: Like the other CRAs, Equifax provides credit scores for free but charges you for a detailed credit report after the 30-day trial period. Clearscore is another service that taps into the credit data maintained by Equifax. They offer both the credit score and the credit report for free.

    That said, when checking your credit score through all or any of these agencies, a few things that you need to remember are:

    • Always go through the terms and conditions before signing up for their service

    • They will typically auto-debit their fees once the trial period is over. So, remember to unsubscribe if you are not interested in continuing beyond the trial period

    • You are not obligated to buy any service or financial product from these agencies in return for this information

    • Checking your credit score through a CRA or another agency does not adversely affect your credit rating

    How can I improve my credit score?

    A low credit score is not a done deal that will haunt you forever. If anything, your credit rating is dynamic. This means that consistent efforts will help you build your score, albeit the process is gradual and slow. So, don’t harbour unrealistic expectations.

    You can significantly improve your credit rating over a period of 3-4 years. But the trick here is to practice budgeting and discipline when spending, borrowing and repaying.

    Of course, a few things will positively impact your credit score quickly and without calling for a significant effort on your part. For instance, getting yourself listed in the electoral roll of the area is one way to convey your stability and reliability. Some other things that you can do include:

    1. Pay bills and debts on time: A sure-fire way to demonstrate that you can manage your finances properly is to be diligent about paying your utility and service bills and repaying your loans on time.

    2. Keep on top of your credit limits: Another way to demonstrate savvy financial management is to ensure that you don’t exceed your credit limits and do not allow your bank account balance to exceed the minimum requirement. If misses on this front are owed to losing track of when payments are due, use online alerts and banking apps to be in control of your payment schedules.

    3. Settle outstanding debts: One way to communicate that you have improved your money management is to make good on your promises to repay previous loans. So, work on settling any credit agreement defaults or outstanding county court judgments as soon as you comfortably can.

    4. Go slow with new credit applications: When applying for new credit cards and/or loans, institutions usually do a hard credit check, bringing down your credit score. So, don’t apply to multiple financial institutions at once; the same goes for applying for credit cards from several providers at the same time. Instead, spread out these applications over a period of several months.

    5. Use eligibility checkers to lower the impact of being turned down for credit: While applying for a loan or a line of credit and then being turned down will adversely impact your credit rating, checking your eligibility for a loan or credit product will do no harm.

    6. Don’t let past associations impact your credit standing: Sever all financial ties with past business and personal partners and housemates, such as utility bills issued in joint name and joint bank accounts. Keeping these open allows the bad credit rating of others to impact your credit score. You will have to ask each of the CRAs to add a “notice of disassociation” to your file to cut such financial ties.

    7. Establish a trend of good debt management: If your poor credit score is attributed to having never taken out a loan before, getting a credit-builder account and making timely payments on it is an effective way to establish a solid credit record.

    8. Regularly check your credit report: At the least, check your credit report every year to ensure that there are no errors. This approach will also help you catch instances of identity theft before they become a financial nightmare.

    9. Use direct debit to manage your repayments: Setting up direct debits helps improve your credit standing in two ways. For starters, it is an effective way to ensure you don’t miss scheduled repayments. Second, it shows prospective lenders that you are confident about the inflow of funds into your account and hence in the consistency of your earnings.

    10. Be conscientious about how much you borrow: Your credit utilization is also a factor when it comes to your credit score. This is essentially a ratio of how much credit you have actually used as compared to the total line of credit available to you.

    For instance, if you have incurred charges of £2,000 on a credit card with a maximum limit of £3,000, you have used up more than 60% of your available credit, and that puts you in the red. Make a conscious effort to keep your debts in the range of 25% to 30% of the total credit limit available to you. If you end up with a higher charge, repay as much as is required and get back in the desired range.

    Finally, it’s often suggested that you close down old accounts, especially those with open credit facilities on them, to improve your score. What you need to understand here is that the availability of credit on a particular account/card will only make a difference to your credit rating if it’s used but not repaid in time.

    However, a lender may see things differently. Depending on the institution you approach, such an account could be perceived positively because it is an old account you have managed to keep in the green. Hence, it is a testament to your credit management abilities and credit worthiness.

    On the flip side, some institutions may view it as a potential risk as an open line of credit means that after acquiring a loan from them, you may proceed to use the available credit, putting yourself in a position where you are no longer able to handle all the repayments. So, consider both these outcomes when deciding on whether or not to close an old account/card.

    Can I still get credit with a bad credit score?

    Many online and specialized lenders specifically work with first-time borrowers and/or poor credit borrowers. In addition to such establishments, you can approach non-institutional lenders through Peer to peer lending platforms.

    Moreover, several credit products are specially designed to meet the credit requirements of small business owners as well as individuals with adverse credit ratings. So, there are opportunities to borrow with bad credit as long as you make the effort to find lenders who do not base their lending decision exclusively on your credit score.

    Having said that, you also need to understand that your credit is not the be-all and end-all factor when it comes to loan/credit approval. Yes, it is an extremely important factor, but a good credit score is by no means a guarantee of loan approval.

    How Long does it take to rebuild your credit rating?

    The time it takes to improve or rebuild your credit history can vary depending on your circumstances and financial behaviour. 

    Generally, you may see improvements in your credit score within a few months if you consistently practice responsible credit management. However, raising your score and rebuilding your credit history could take several years.

    Factors that affect the time it takes to rebuild your credit include:

    Negative information on your credit report: Late payments, defaults, and charge-offs usually remain on your credit report for seven years. Bankruptcies can stay for 7-10 years, depending on the type. As these items age, their impact on your credit score diminishes.

    Payment history: Consistently making on-time payments is crucial to improving your credit score. Payment history can account for about 30 – 40% of your score, so establishing a track record of timely payments is essential.

    Credit utilization/ debt to income ratio: Aim to maintain a credit utilization ratio below 30% to impact your credit score positively. Reducing and keeping your balances low can help improve your credit more quickly.

    Credit mix: Diversifying your credit mix can help improve your credit score over time. A combination of different types of credit, such as credit cards, instalment loans, and mortgages, shows that you can manage various credit products responsibly.

    Length of credit history: A longer credit history with a record of on-time payments can improve your credit score. This factor takes time to develop, so patience is vital.

    Hard inquiries: Limit the number of hard inquiries on your credit report by only applying for new credit when necessary. Hard inquiries can temporarily lower your credit score and stay on your report for two years, so use soft-search eligibility checkers when possible.

    Derogatory items: The time it takes to rebuild your credit can be significantly longer if you have major derogatory items, such as bankruptcy or foreclosure, on your credit report.

    Remember that rebuilding your credit is a gradual process that requires consistent effort and responsible financial management. By practising good credit habits and monitoring your progress, you can gradually improve your credit rating and access better credit products and lower interest rates.