Mr M asked:
I am trying to build my credit score but feel I am getting nowhere.
I had 2 accounts in default which I paid about 1 year ago. My bills are paid on time. I have a Capital One credit card with a £200 limit. I always get £50 worth of petrol on the last Friday of every month and pay it manually a few days later.
But I got an email from Credit Karma saying “When your last report came through, it showed that you weren’t using any of your total credit limit. Not using any credit can actually mean your score suffers, as lenders can’t see you using credit responsibly.”
Is there something I’m doing wrong?
How frustrating! Sometimes trying to rebuild your credit score feels impossible.
Doing most of the right things to improve your credit score…
Getting a credit builder card is supposed to help your credit rating. And if you use it correctly, it works.
Mr M is clearing the balance every month. That should be best for his credit score. It also means he pays no interest, which is important with credit builder cards which have high interest rates.
And he is only using 25% of his credit limit which is good. It avoids problems with a high credit utilisation.
But why does his Credit Karma report say he isn’t using the card?
The one thing he is doing wrong!
The Credit Karma report is a snapshot of his TransUnion credit file. It just shows what Capital One has reported to TransUnion about his account at that point in time.
The report doesn’t see all the things he has bought during the month. Because Mr M is crediting his account with the money for the petrol after a few days, it isn’t showing up. So it is as though he hasn’t used the card at all!
The way round this is for Mr M to stop paying the card balance by transferring it from his bank manually.
All credit cards let you set up the account to be paid in full every month by direct debit. When you choose this, you get your credit card statement each month and the balance on that will be collected by a certain date.
This will mean he pays for the petrol much later. Filling up the car at the end of July and the balance will show on a statement in August and will be collected by direct debt probably in September. But he still won’t be paying any interest on this.
Most credit cards let you change the date the direct debit comes out to one that suits you. Many people like this to be their payday day.
And one area to try to improve
This credit builder card has a very low limit at the moment, less than £250. This is seen as a sign that lenders don’t really trust you, so it loses you points on your credit score.
This isn’t a large amount – only 40 points. See my article How much will my credit score change if… which looks at how important factors such as limit sizes and low utilisation are.
But if Mr M can ask Capital One to increase his limit to £350, that would be a small improvement.
Larger than that doesn’t make any difference until you can get over £5000.
All this is going to take a while
Paying his bills on time and using the credit builder card will start to get new, good marks added to his credit record. But with two defaults on his credit record, it is going to take time for Mr M’s credit score to improve.
The harm done by the defaults gets a bit less as they get older – How much will my credit score change if… gives the numbers. The defaults will drop off 6 years after the default date. And then his credit score will jump.
He has repaid the defaults – that’s good as it will make lenders much happier about offering him more credit. But it doesn’t actually affect his credit score.
Jumping through hoops
Credit scoring in Britain often seems to make little sense.
- Why is Mr M any more creditworthy if he repays his account by direct debit rather than paying it off just a few days after he buys something?
- Where is the incentive to pay off problem debt when it doesn’t help your credit score?
- Why should someone who is well paid, been saving money steadily for a house deposit and never had a loan or a credit card, find it hard to get a mortgage?
But those are the rules. Although jumping through hoops to get a better credit score seems daft and hard, you need to get it right.
My credit score is up but affordability down!
Tackling maxed out credit cards
Gordon KENT says
I have absolutely zero faith in CRAs , they are quick to debit but very slow to credit and are just a blunt instrument to measure the poor, because if I was rich I wouldn’t care about my credit score. Also CRAs are not very discerning , as any debt I have which has been restructured to interest free balance transfer credit cards , which reduces my overall long term debt and lowers my monthly payments , yet my score drops by nearly 200 ?. If I was a Company and restructuring the Company’s debt , the Stock Exchange would love it and the Share price would increase. Thanks
Sara (Debt Camel) says
I agree. A credit score just looks at bits of your financial history. Of course it is useful for a lender to know if you have defaulted on something recently – but 6 years punishment for a slip which you corrected quickly?
Switching to 0% balance transfer cards often causes a dip – first because any new credit does! But also because at the start you often have a high utilisation rate on the new 0% card. The answer I am afraid is to repay it as quickly as possible – if your old high monthly payments were affordable, carry on with them, don’t drop to the new low minimum payments.
Gordon KENT says
Hi , Thanks for the reply Sara , as always ever helpful and totally correct.
Thanks
Garry Evans says
I would say this as I am a huge advocate of open banking, working for an organisation who has always had a vision for the use of Open banking to better understand consumer’ financial situation, but I think the answer here is to use Open Banking!
The current model looks at affordability – the ability to afford the repayments of a particular credit today, separately to the credit worthiness – how likely a person is to default on repayments based on historic performance. But the 2 elements are intrinsically linked. That default 4 years ago should be looked at in the context of the person’s affordability back then – if they had lost their job or had some sort of affordability crisis that explains why they missed payments, then that should only be taken into account if they are still in that situation. If their affordability is better and has been stable for 6-12 months then they should not be penalised for a tough time they had in the past. Open Banking is the tool to enable creditors to look at these factors, although they are not quite there yet. It is the same for consumers who have completed a DMP or an IVA successfully – their credit score is terrible but these are a group of people who have proven affordability and have demonstrated they can make significant payments reliably for a long period of time.
Sara (Debt Camel) says
I think a combination of credit records and open Banking is the way to go. OB shows payments that are being made – not those you aren’t paying. But I completely agree that someone who lost their job 4 years ago and is now back on their feet and up to date with credit deserves respect, not defaults still harming their chance of affordable credit.
Mick says
I started ‘rebuilding’ my credit score 2 years ago and only now really seeing the hard work pay off. It really is a journey, that’s the truth! Here is what I learned.
The only thing that gets reported to the reference agency is your monthly statements. If you clear your balance before the said statement is produced every month the balance will always show zero.
Your credit score will fluctuate quite a bit monthly, annoying but unfortunately true.
It is essential to make sure all your details are correct and matching on each agency’s records – you would be surprised at how miniscule the error has to be to greatly impact your score.
After a round four months some card issuers start offering you credit increases, if you accept these increases it helps your score but just be careful not to overspend – I accept some increases but let some go. It just depends on how much it decreases your credit utilisation. I try to keep mine below 50%.
It really is a good idea to to pay more than the minimum payment every month as this vastly decreases the amount of interest you pay and shows you have an certain degree of expendable finance.
Manage your finances responsibly and it will pay dividends with regard to improving your ratings.
Hope this helps.
Regards Mick
Jay says
Hi Sara
I’ve been monitoring all my reports and scores.
I’ve dropped 99 points with Experian recently as I opened a new car insurance account in august (I switched this time to get a better rate).
And I got my daughter a sim-free o2 contract, she is 11 and needed a reliable phone. Her birthday was July.
Both 2 accounts. New but only low payments.
Have caused such a drop in score – I assume because it was 2 in a short space of time, but quite unavoidable.
I wouldn’t open the phone contract months before and pay for it. And insurance was running out.
Another thing I’ve noticed is that my car insurance didn’t even exist before as being reported to Experian, so the 2 years worth ( I stayed longer with them) of “on time” payments aren’t even taken into consideration.
Do I ask Experian to record this account?
Will the 2 new accounts help my score after a few months of good standing , and recoup the big drop?
Finally I have a credit builder card – Vanquis, had OVER a year, £250 limit. Always paid in full with direct debit, never exceed 25% utilisation. But no limit increase.
Have requested several times. They tell me I need to wait. And that maybe it would be helpful to spend more and pay more. But that goes against the utilisation aspect.
They advertise on their site limit increases after 5 months.
Not sure what else I can do!
Sara (Debt Camel) says
Do I ask Experian to record this account?
No, it is the creditor’s choice what they report to the credit reference agencies.
Will the 2 new accounts help my score after a few months of good standing, and recoup the big drop?
If the new accounts was the only reason for the drop, yes after 3-6 months.
Don’t start spending more on the Vanquis card, just carry on and don’t ask for a limit increase for another 6 months.