The importance of building your credit score

Written by
Pete Howroyd
Co-founder & CMO
Renters
August 2, 2019

To improve your chances of receiving credit and of lenders being willing to lend to you – so important when it comes to getting on the property ladder – it’s vital that you build up your credit score while renting.

This is something that Canopy allows you to do, improving your creditworthiness and enabling you to take great strides towards home ownership – if that is your ultimate goal.

What is a credit score?

Your credit score helps to show lenders how worthy of credit you are, and how safe you will be to lend to. The credit score, also sometimes known as a credit rating, is a number which aims to reflect the likelihood of you paying credit back. The higher this score is, the better your chances of being accepted for borrowing.

There are three main credit report agencies in the UK - Equifax, Experian and Callcredit – which enable you to check your credit rating, either for free or a small fee.

Experian, who we have a close partnership with, is the most high-profile credit report agency in the UK and allows users to check their credit score for free. Its credit score offers a score out of 999, with the following categories – very poor, poor, fair, good, excellent – to rate how good a person’s credit score is and how creditworthy they are.

If you have an excellent credit score, you have a better chance of being accepted for credit at the best rates. Your credit score influences your chances of getting credit cards, loans and mortgages, as well as finance for cars, mobile phone contracts and property rentals.

Before applying for a mortgage, you will need to know your borrowing history and your current credit rating to work out how realistic your chances of homeownership are – particularly in an era where affordability checks are tougher and lending criteria is much stricter.

Your credit history will offer lenders accurate information on your ability to repay debts. When deciding whether to lend to you, banks and building societies will use your credit file and credit score to calculate the level of risk in lending to you. If your score is low (very poor, poor or even fair), it is advisable to improve it before applying for a mortgage.

A low credit score and poor credit history will severely hamper your chances of being accepted for credit, with lenders highly likely to be reluctant to lend to you.

However, up until recently, rental payments weren’t factored into credit histories, despite being a sum that is paid back regularly each and every month.

How can Canopy help you to build a positive credit history?

Canopy, however, can ensure that renting really pays by allowing it to improve your credit score. Our RentTracking product enables renters to build credit by paying rent on-time, boosting creditworthiness and financial inclusion into the bargain.

RentTracking is the best way of building your credit history without taking on new credit. And, what’s more, it’s completely free to use.

It tracks whether you have paid your rent on-time each month and then uses this data to improve your credit score through our tie-up with Experian. By providing us with read-only access to the bank account you use to pay rent, you enable us to pass this data to Experian, who then add this information to your credit file and improve your credit score over time.

At present, rent payments are not recorded on your credit reports in the same way a loan or mobile phone contract is, despite rent being the biggest monthly outgoing for most people who reside in this form of tenure.

But now, thanks to Canopy, wherever you live in the UK, you have the ability to add your biggest monthly outlay to your credit history and secure the best deals on credit.

How else can you improve your credit score?

One of the best ways of proving you can reliably pay back what you owe each month is to pay all your bills on time – whether this is for your phone, your car, your insurance packages, or utilities. Even if you have a strong credit score, it’s not the time to get complacent if you’re considering home ownership in the near future – it’s more important than ever, in fact, to show what a reliable borrower you would be in the lead-up to a mortgage application.

Your credit history is ongoing, and you won’t want to sow any seeds of doubt in the minds of your would-be lender by slipping up or ignoring payments. If you show you can pay back what you owe on a consistent, regular basis, this is going to make you an ideal candidate when it comes to repaying on your mortgage and increases the chances of lenders being happy to lend to you.

Other ways of getting yourself mortgage-ready, and not damaging your credit score, include avoiding any unnecessary or reckless borrowing, keeping credit applications to a limit, cutting your debt-to-income ratio (lenders prefer applicants with a lower ratio as they are lower risk and more likely to pay their mortgage repayments each month), making sure you’re on the electoral roll so you can be easily identified and ensuring any joint applications add up.

In other words, if you’re buying with a spouse, partner, friend or sibling – as many people will be – you need to make sure both of your credit scores and credit histories are in order as lenders will consider both when choosing whether or not to lend to you.

As the above outlines, then, building your credit score over time is hugely important – especially if you want to take your first steps on the property ladder. Lenders are likely to take you far more seriously if you have a good credit score and credit history on your side.

And now, thanks to our Experian partnership, renting can be one of the best ways of boosting your credit score – as should be the case for a significant financial outlay.

In addition to helping renters to boost their credit score by paying rent on time, we also help tenants to say hello to a new way of renting by simplifying the rental process, saying goodbye to upfront cash deposits and offering up a free digital rental profile in the form of the RentPassport, providing instant referencing, a more streamlined process and information on as and when your references have been approved.

Get Canopy in your inbox

Sign up to our emails for updates, product releases, and tips to make you financially resilient.