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How I Went From Almost Bankrupt to a 700+ Credit Score
I got my first credit card and introduction to the world of credit and unsecured debt when I was either 18 or 19.
I went to open a bank account to have my wages from my first real job paid in to and the manager of the bank mentioned that I might also be eligible for a credit card. “Oh really?” I replied.
Both surprised and pleased; I thought credit cards were for adults and grown-ups with proper jobs and things like that.
Totally unaware at the time, the bank manager, a middle-aged man in an HSBC-issued suit with a moustache, was probably equally pleased, he undoubtedly made a nice little commission on me signing on the dotted line.
A week or so later, along with my new bank account, arrived my first ever credit card!
All shiny and new and with a £1500 limit!
More than an entire month’s wages available to spend on whatever I wanted!
I knew I would have to pay it back with interest, but only a fraction of the debt each month.
At the time, I was still living at home, so I had no real outgoings or expenses (except a car which I used to get to work), so I was quite relaxed about using my new credit card on everyday spending for a young guy this mostly consisted of going out in the evening and at weekends.
I lived in a popular and hence expensive city in the south of England, so there was always somewhere or something to go out to and spend money on – usually on my new credit card.
I always made the monthly payments on time, which, unknowingly to me at the time, would have improved my credit score.
One day a letter arrived from the bank - Great news – HSBC had increased the limit on my credit card! I must be doing something right, right?
No need to reign in my credit card habit.
I quickly ran up the debt on my HSBC credit card to the new limit. So, the next logical thing to do was apply for another credit card – and to my delight, I was approved! But this time, the initial limit was much higher, I can’t recall the exact amount, but it was somewhere in the region of £3,500 - £5000.
Although I was still working and living at home with no rent or bills to pay, I quickly reached the limit on the second credit card.
You can probably guess what I did next.
Correct, I applied for another credit card, and due to the fact that I already had a couple of other cards which I had never missed a payment on, and a good steady income from my job, my credit score was pretty good by then, so the limit on the third card was even higher than the second card.
But this third credit card also mentioned something which I had never heard of before – a 0% balance transfer. This basically means you can transfer or move the debt from one credit card to another, but you won’t pay any interest on the debt for an introductory period; it was usually for a period of around six months.
This seemed like the best option. So, I transferred the debt from credit card A to credit card B and didn’t incur any interest on my debt for six months. Great!
But as an added bonus, it appeared to card A that I had paid off the debt like a responsible borrower, and I was rewarded with a credit limit increase!
I quickly realised that rather than a real person looking at how I managed debt, it was most likely just a computer algorithm.
By ensuring I never missed a payment and got a late payment marker on my credit file and using balance transfers to make it seem like I was clearing my balances in full, I would keep getting credit limit increases and approved for even more credit cards.
And it pretty much worked like that for a number of years. I had more credit cards than I could remember. I had more credit card debt than I would even admit to myself.
But hey, I wasn’t really paying any interest on this debt, and there were always more cards I could apply for, right? So, what was the problem?
The credit card companies wouldn’t be approving me for all these cards if they thought it was a problem, and these multi-billion-pound companies knew more about credit risk and responsible lending than me, right?
As long as I always made the payments on time, the limits increased, and approvals flooded in.
It got to the point where if I applied for a card and the limit was less than £1000, I would turn it down, thinking it wasn’t worth the hassle for such a low limit.
Despite my credit card debt now exceeding my annual salary by a factor of two or three, the offers kept coming through my letterbox, and I kept getting approved. Never once was I asked to prove my income, or that I even had an income.
These truly were the golden days of easy credit.
Cue 2008 and the global financial crash.
The global financial crash, or financial crisis, saw mostly the American banking sector affected at first, and most spectacularly, the collapse of banking giant Lehman Brothers.
Lehman Brothers, the fourth-largest investment bank in the United States at the time, with $639 billion in assets, saw workers from New York to London turning up to the office to find out their employer has essentially gone bankrupt and they were now unemployed, they took whatever personal possessions they could fit in to brown cardboard boxes and left, many in tears as they did so.
The easy credit party was over. Due to the way the financial markets were so closely interconnected, it affected the entire global banking, credit and mortgage sectors and started a global recession, the biggest since The Great Depression.
Suddenly the super-low interest rates on my numerous credit cards went up, and I was no longer finding it easy to get approved for more; years of living off credit was becoming increasingly unviable (not that it ever really was).
I started to miss payments and default on my credit cards; the letters with threatening bold red writing started to replace the offers of more credit cards and 0% balance transfers.
Years of irresponsible borrowing on my behalf and irresponsible lending by the credit card providers had come to a head.
All my creditors were constantly demanding payment by mail, phone, email, text, any form of communication really, one debt collection agency even used Facebook!
I was lucky, compared to some people; I didn’t own any assets they could take, I didn’t own property, and there was no point in taking me to court to try and recover the debt.
Most just sold my credit card debt to debt collection agencies to recover something, and I would deal directly with them.
But my credit score was obliterated. I couldn’t even get mobile phone contract, a far cry from the £10,000+ credit limit cards I was being given 18 months earlier.
Whenever you miss a payment or ‘default’ on a payment it is recorded on your credit file with at least one, but usually all of the credit reference agencies (Equifax, Experian, TransUnion, and Crediva) and remains on there for a period of six years.
Although I still have most of my credit card debt, it is now owned by debt collection agencies who I have agreed repayment plans with, but as more than six years have passed since I originally defaulted on the original debt (missed payments), the majority no longer appear on my credit report and this is improving my credit score and it is the higher range and I’m able to get approved for most credit products now, along with some other techniques which I will describe below.
Whether you want to improve your credit score after taking on too much debt like me and missed payments, or you simply have a low credit score because you have just turned 18 or have never had any credit ‘products’ before, you will find all the information and advice below on how to build and improve your credit score in the UK.
What Is a Credit Score?
Your credit score is a number assigned to you by one of the four major credit reference agencies based on a number of factors, but primarily how you manage credit and debt and your credit risk. The score ranges from 0-999 (Experian), 0-1000 (Equifax), 0-710 (TransUnion) and are usually banded in to ranges which include 'Very Poor', 'Poor', 'Fair', 'Good', 'Very Good' and 'Excellent'.
The higher your score and as close to the maximum range, the better, as this will mean you will be far more likely to be accepted/approved when you apply for credit; this will apply for any credit product, this can include a mobile phone contract (as opposed to a PAYG), overdraft, credit card, loan, car finance and a mortgage.
Each credit reference agency will calculate your score slightly differently, so you should expect to be given a marginally different score and 'band' across the various agencies.
When you apply for a credit product (credit card, loan, mobile phone contract etc.) the company will conduct a search on one of the credit reference agencies to see your score and use their own internal scoring system to decide whether or not to approve you for that product, the limit or amount or credit they will give you, and the rate of interest you will pay calculated as an Annual Percentage Rate (APR).
An analogy or another way of explaining it could also be your relationship to credit.
If you always pay your debts on time and don't take on too much credit, your relationship with credit would be good, or even excellent, and reflected in your score.
Equally, if you fail to make payments on time, default on your credit agreements, take on too much credit/debt or use too much of your available credit, your relationship to credit will be bad and reflected in your credit score.
But if you have never taken out a credit product like a credit card or loan, the credit reference agencies will have nothing to gauge your 'relationship' to credit with, and you may end up with a low score.
Improving and quickly increasing a low credit score because you have never had a credit product before (maybe because you have just turned 18) and have no credit history is far easier than because you have a bad credit history.
If you are in the position of having a low credit score because of a lack of credit history, it can be quickly improved through careful selection and use of credit. I will explain below how someone with little or no credit history can build their credit score relatively quickly.
Credit Scores and Banding Across the Three Major Credit Reference Agencies
|Very Poor||Poor||Fair||Good||Very Good||Excellent|
Why Do I Need a Good Credit Score?
You might be lucky enough to have a bank balance running in to six figures and never plan on taking out credit and think that having a good credit score is unimportant to your situation.
If you can make it through life without ever having to borrow money, that is great, but there are some other reasons why having a good credit score is important.
Landlords and letting agencies will often carry out a credit check on you and use your credit score, partly, to make a decision whether or not to let a property to you.
Employers are increasingly using credit checks as part of the application process; some industries like law and finance firms are legally required to perform credit checks on potential employees.
I have experienced this personally when applying for an NHS role (I successfully passed through to the next stage, maybe this would not have been the case if I had a lower credit score).
The logic behind this is that if you are employed in a position where you are responsible for managing another person’s, or company’s finances but appear incapable or reckless with your own, you might not be suitable for the role.
You will often need to have a credit card when hiring a car or staying in a hotel that the company can hold the details of in case of any unexpected costs or fines, especially outside of your home country.
Better Financing and Credit Opportunities
The better your credit score, the more credit products will be available to you and at a much lower APR. If the last couple of years has taught us anything, it’s that we should expect the unexpected; and it’s always better to have it and not need it than need it and not have it.
How to Check Your Credit Score
You can view and check your credit score with the three major credit reference agencies (Equifax, Experian, TransUnion) for free and see your numerical score and credit rating banding; for an additional monthly fee, you can see a more detailed report which will show every credit agreement on your file.
But most offer a 30-day/1-month free trial; this will usually be sufficient to see all the data and identify any errors or any credit agreements that you don’t recognise. This could simply be credit agreements you have forgotten about or credit agreements taken out in your name that you are unaware of (identity theft).
Crediva, while still a credit reference agency that collects financial data on UK residents, is probably the smallest and least used by lenders when making a decision to give credit to someone. You can still get your Statutory Credit Report from Crediva which will contain ‘raw data’ on your credit history, but it won’t provide an attractive user interface and numerical score like the other three.
ClearScore is a website where you can access your score and report for free, but it is not a CRA (credit reference agency), as they don’t collect the data themselves, instead, ClearScore gets the information from Equifax (in the UK). Founded in 2015, the company provided free access to detailed reports that you could only obtain by paying a monthly fee to one of the CRAs; however, today, much of the information you can access on ClearScore can also be accessed for free directly from the CRA.
However, one useful feature is that they also list credit products (loans & credit cards) and the likelihood, based on your credit score, of you being approved for that product which can be useful if you are trying to build your credit score.
How to Improve Your Credit Score
Trying to improve or increase your credit score may seem like a dark art, shrouded in mystery, but if you just follow a simple set of rules and practices, you should be able to see a real improvement in your score, depending on your credit history, sometimes in a matter of months.
After you have accessed your credit score with one or more of the credit reference agencies, you should be able to identify whether your low score is due to having a bad credit history or no credit history.
Identify Factors on Credit File That Are Lowering Your Score
There are a number of factors which can lower your score, but by far the greatest is missed or defaulted payments on credit agreements (mobile phone contracts, mail order catalogues, credit cards, loans, car finance, mortgages) and these should be given priority.
You may have forgotten about an account or opened an account and not realised that it was actually a credit agreement (mail-order catalogues are a common culprit), moved house and not updated your address. This can result in even a small debt on the account, causing it to default and dragging down your credit score.
You should look at any open or closed credit agreements (if you have any), expand the payment history and look for any missed payments or defaults.
Below is an image of the payment history for a 4G Internet router account I had; I had a direct debit set up to pay the monthly bill, but somehow a payment was missed (indicated by a red mark April 2021).
Missed or defaulted payments stay on your file for a period of six years, but have less of an impact over time, i.e. a missed payment three months ago will have a greater negative impact than a missed payment three years ago.
You should contact the company and repay the debt; if you have a legitimate reason for missing the payment, you can also explain this to the company and request that they update your file and remove the missed payment marker.
Sometimes they will, sometimes they won’t, but it is always worth asking; the best outcome is that they will remove it; the worst is that they won’t, and you won’t be in a worse position.
Don’t Ignore Debts
Ignoring a debt will not make it disappear; in fact, it will often only make it worse, bigger, and have a greater negative impact on your credit score, worst case scenario it might even end up in court and you could end up with a CCJ or even a conviction.
The best option is always to open a dialog with the company you owe money to; you might be surprised at how accommodating and reasonable they can be; just by showing that you are attempting to resolve the issue will often result in them working with you, rather than resorting to debt collectors and bailiffs and further costs.
Depending on the type of debt and the amount you owe, many creditors will be willing to freeze interest and work out a repayment plan with you, allowing you to repay the debt without having to go down the route of a CCJ, IVA or bankruptcy, all of which have greater and longer lasting negative impact on your credit score.
Ensure You Are on the Electoral Roll
Being registered to vote at your current address, which means you are on the Electoral Roll with your local authority (Council) will improve your credit score as it helps lenders to establish your identity; being registered to vote gives you the option to have your say when it comes to voting, but does not oblige you to do so.
It should also make it more difficult for you to become a victim of identity fraud, it’s free to register, so there are only benefits and no drawbacks to getting on the Electoral Roll.
Avoid Applying for Too Much Credit
Desperation is never attractive, and this is true when it comes to applying for credit to lenders.
Every time you apply for a credit product a ‘hard search’ will be conducted and recorded on your credit file and this can be seen by other lenders, if you have multiple searches on your credit file in a short space of time this might indicate to other lenders that you are in financial difficulty and desperate to obtain credit, and it will lower your score.
When applying for credit products, you should carefully choose the ones you really need and are likely to be approved for; many lenders and price comparison sites will indicate your likelihood of being approved before you apply.
Avoid Changing Address Too Much
Lenders like to see stability, so changing address frequently can have a negative impact on your credit score, and multiple address over a short period of time can reduce your credit score; admittedly, this is often outside of your control.
If you are living in temporary accommodation such as student halls or travelling for a short period and don’t plan on applying for credit at these addresses, you most likely won’t need to update your address.
You should never register an address or apply for credit at an address where you have never resided.
Use a Credit Builder Card
Building your credit score can be a catch-22 situation; you can’t improve your credit score without using credit, but if you can’t obtain credit, you can’t improve your score.
When you are in this position, either because you have no credit history, or bad credit history, one of the best options is to use a credit-builder product. The term ‘Credit builder’ is used to describe a number of products ranging from very high-interest credit cards to guarantor loans.
But the product which I found to be the most effective and had the biggest positive impact on my credit score was a credit builder card called Bits. Bits is a subscription service where you pay a monthly fee which repays the ‘debt’ on a digital credit card, but you will not receive a physical card, you cannot spend anything on this ‘digital credit card’, and you will not receive any money back. But each month, you make a payment on time Bits will report this to all of the major Credit Reference Agencies, improving your score.
They have a range of subscription levels which will give you a relative ‘virtual credit limit’. I opted in for the £40/month subscription which gave me a virtual credit limit of £1440 because having a credit limit of over £1000 on a single credit card has a slightly bigger positive impact on your credit score than a limit under £1000.
While I found this product to be very effective at improving my credit score, if you have factors such as a recent CCJ (County Court Judgement), IVA (Individual Voluntary Arrangement) on your file, or have recently been made bankrupt, the positive effects of Bits probably won’t outweigh the negatives; it would be best to use the money to repay your existing debts.
You should be aware that while using Bits and making the payments on time each month can improve your credit score, missing a payment will have a negative effect and be recorded on your file just like any other missed payment for a period of six years, so you should carefully consider whether you can afford to make the monthly payments.
Use Credit Products
The best way to improve your credit score is simply to use credit products; your credit score is based largely on how you use credit. You just need to demonstrate to lenders that you are a low credit risk; if they lend money to you, you will replay it.
Banks, credit card & loan providers want to lend you money and charge interest, that is their basic business model, but they want to ensure that you will repay the debt plus interest.
By using credit products, essentially borrowing money, and then repaying it within the agreed timeframe, the more attractive borrower you will become, and this will be reflected in your credit score, and other lenders with stricter lending criteria will be more likely to approve you for their credit products.
In addition to using your credit score from the major Credit Reference agencies, lenders will also use their own internal scoring systems when deciding whether or not to approve you for a product and to decide how much credit to give you.
I have found that if you are trying to build your credit score quickly, it is best to apply for and accept any credit card that you are likely to be approved for, even if it has a high APR and low limit (£200 to £400), which it likely will do, but if you use it regularly and keep the balance with 30%-50% of the limit and clear the balance each month, you should expect a limit increase within six months and increase in your credit score. This is because you have demonstrated to the lender’s internal system that you are a responsible borrower; if you continue to use the card in this fashion, you should expect further limit increases and improvements to your credit score.
Once you have improved your credit score by carefully using a credit product like this, even if it is a high interest one, you should then have a better credit rating and be able to apply for other credit products with lower, more attractive interest rates.
As a general rule, credit products which are the easiest to be approved for, such as overdrafts, mobile phone contracts and mail-order catalogues have the least positive impact on your credit score, and those which are the most difficult to be approved for, such as mortgages, have the greatest impact. You can use what I call a ‘laddering up’ technique where you apply for and use the credit products you are most likely to be approved for which will have the biggest positive impact on your score, and once your score improves and you move into the next credit ratings ‘band’, you can apply for the next product which requires a higher score, but will, in turn, improve your score further.
If you are using credit products to build or improve your credit rating, you must make sure that you never miss a payment or default on an account, as just one late or missed payment can have a huge negative effect on your credit score. I would highly recommend setting up a direct debit to pay at least the minimum monthly payment in case you forget or cannot make the payment manually on time for some reason.
You should also always make sure that you can afford to take on debt and remember that interest will be added, especially on credit cards and compound interest if you fail to pay more than the minimum monthly payment or clear the balance each month.
Never Take Cash Out on a Credit Card
Most credit cards will allow you to take cash out from an ATM, in addition to using them to make purchases; while this might be convenient and good for emergencies, the APR is usually considerably higher than for purchases.
But taking cash out on a credit card will have a negative effect on your credit score, not a huge one, but when you are trying to build your score and pushing your rating into the next, higher ratings band, you want to do everything you can to increase, not decrease your score, and not taking cash out on your credit cards is an easy win.
Keep Credit Utilisation Low
Your credit utilisation is how much of your available credit you are using, and by keeping it low, it will demonstrate to lenders that you are a responsible borrower. You will see an improvement to your credit score.
You should keep your credit utilisation low, usually below 50% of your credit limit, but below 30% is even better. So, for every £100 of credit you are given, you should try to run up no more than £30 – £50 of debt.
If you have a card with a £1000 limit and spend £500 on it, your credit utilisation will be 50%, but credit utilisation is taken across all your credit cards, so if you have two credit cards both with a £1000 limit (£2000 limit in total) and £500 on debt on just one card, your total credit utilisation will be 25%, well within the recommended range.
But it is still advisable to keep your credit utilisation low with all your credit providers as this will have a positive impact on their internal scoring system and may result in a credit limit increase (which will lower your overall credit utilisation) or a lower APR.
How Long Does It Take to Improve Your Credit Score?
Hopefully after reading this, you can see that your credit score is based on a number of factors and will vary from person to person and individual circumstances.
However, it is far easier to build your credit score when you are coming from a position of having no credit history because you have just turned 18, or never had any credit products before than trying to recover from having bad credit because of missed payments, defaults, CCJs, or bankruptcy.
I would expect that someone without any negative influences on their credit report (no missed payments, defaults, CCJs, IVAs or bankruptcies), through the careful and selective use of credit products, could expect to see a healthy increase in their score in a 3 – 6 month timeframe.
But for someone who is in the position where they have a low credit score because of negative influences such as missed payments, defaults, CCJs, IVAs or bankruptcies, which remain on a credit file for 6 years, it can take a considerably longer time to recover, 18 months – 3 years, or longer is a realistic timeframe.
The negative impact missed payments, defaults, CCJs, IVAs and even bankruptcies have on your credit score do diminish over time until they are finally removed after six years, but they will still have a significant impact and mostly likely prevent you from achieving that ‘perfect’ credit score.
But I do know of people who have declared themselves bankrupt after running up huge credit card debt and later been approved for a mortgage, so it is completely possible, with careful management of debt and personal finance to recover from the direst situations.
I hope after reading this, you have a better understanding of what a credit score is, how to check your credit score, what affects your credit score, how to build and improve your score, and the difference between simply having no credit history and having a bad credit history, how this can result in a low score and how to improve it.
- Check your credit score with the three major credit reference agencies (Equifax, Experian, TransUnion).
- Identify factors on credit file that are lowing your score.
- Don’t ignore debts.
- Register to get yourself on the Electoral Roll.
- Avoid applying for too much credit.
- Avoid changing address too much.
- Use credit builder cards/products.
- Selectivity use credit products.
- Don’t take cash out on credit cards.
- Keep credit utilisation low.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2022 SpaceShanty