A bad credit score can ruin your life – going far beyond banks telling you “no”, it also means that everyone from employers to landlords rejects you. But can the clever “30% rule” really fix yours?
Image: shared content unit)
Every person in Britain has a score. Three numbers that define the course of your life whether you like it or not.
A good score can saving you thousands of pounds a year while a bad one can see you locked out of everything from phone contracts to jobs .
So when we learned that a simple “30% rule” could save your credit rating, we decided to investigate.
Everything you need to know about credit reports
What is the 30% rule?
The idea is simple: if you have a card or an overdraft, only borrow 30% of your limit.
So if you have a £3,000 limit on your credit card, don’t borrow more than £900 – even if you still pay your bill in full each month.
The idea here is that you show lenders that you are responsible – that when they give you money to spend, you don’t waste a lot.
But is it as simple as that? We spoke to experts to find out.
The truth about the 30% rule
Normally, if it sounds too good to be true, it is. And unfortunately, this is also the case with the 30% rule.
“The logic behind the 30% rule is sound, but it’s an oversimplification and certainly not a magic bullet for improving poor credit scores,” Tom Eyre, founder of Credit-Improver.co.uktold Mirror Money.
“Don’t think your creditworthiness will skyrocket if you keep your credit utilization below 30%.”
And it turns out that even the quoted 30% could be wrong.
“Ideally your credit card balance should be zero, but of course that’s not always possible, and if you never use a credit card you could lose it,” explained expert James Jones. in consumption to the credit rating agency. Experian .
So what is the ideal percentage?
“As a general rule, you should have a balance below 25% of the credit limit to help your credit score,” Jones told Mirror Money. “Although any balance below 50% of the credit limit is still useful.”
Worse, while sticking to a low percentage is a good idea, it’s a shame to try to get around this problem by taking out a credit load to limit your borrowing to 25% of each of your cards.
Indeed, lenders get nervous if you are looking to withdraw a lot of cards in a short time or if your total available credit is much higher than your monthly income.
And the amount of your available credit you use is far from the only factor in play.
How to actually improve your credit score
While it’s clearly important to watch how much of your available credit you’re using, it’s far from the only factor.
“Don’t think your creditworthiness will skyrocket if you keep your credit utilization below 30%. To understand why, we need to know what a creditor is looking for when assessing your creditworthiness, i.e. , in short, if you’re likely to repay the money they lend you,” Eyre said.
“Understanding your creditworthiness is basically understanding your behavior. Every data point on your credit report tells them something about your behavior. Some will be good, some will be bad, either way they’ll take that data behavioral and will decide if you’re a good fit for them to lend.
Here are his top 8 ways to REALLY save your credit score:
Register on the electoral lists – This shows stability and pins you to a physical location, which is very positive for someone considering loaning you out.
Don’t miss payments – It sounds simple, but if you miss a payment, it says a lot about you. It’s behavior, and for future lenders, it’s bad behavior – if you’ve done it before, you could do it again.
If you can, use some credit – Getting a credit card or loan and managing it properly shows that you can handle credit. This is an advantage for potential lenders because it demonstrates positive behavior, which they would like you to continue if they lend you. If you can’t get a loan or credit card to get started, which is quite common, services like credit-improver.co.uk can give you the chance to create a basic payment history.
Use software search – Many sites now offer the ability to research your application against a number of lenders, giving you an idea of the likelihood of you being accepted before you make a formal application. Formal applications leave a footprint, which you don’t want. Consider it a free trial before jumping in with a full app.
Separate your finances – If you can keep your finances separate by not applying for financial products with other people, do so. Whatever happens, one of you will be more creditworthy than the other. That means they either pull you down or you knock them down – you don’t need that hassle.
Check that you are only known by name – If you have multiple aliases, either by changing your name legitimately or by applying for credit under different versions of your name (Jonny Smith, Jonathan Smith, Jon Brian Smith, etc.), this can prevent creditors from trusting you . Innocent reason or not, creditors don’t know you personally so they can only work on a snapshot provided by your credit report.
Try not to move too often – If you have to move, there’s not much you can do about it. Just understand that changing your address will make you seem less stable and therefore hurt your creditworthiness.
Keep your credit utilization low – Here lies the 30% “rule” – if you max out your credit cards and checking account overdraft limits every month, that shows you rely on them and that’s negative behavior for any creditor considering lend you more. If you can keep usage low, that’s great. Does 29% work where 31% doesn’t? No ! Just do your best to keep it low.