Like many things in life, you may have heard of a ‘credit score’ but not be overly familiar with what it actually is. You may know that it plays a significant role in your finances – but what you really need is to understand exactly how it does this. Then you can make sure it is in tip-top shape to work well for you.

What is the purpose of a credit score?

In simple terms, a credit score, as determined by reference agencies such as Equifax, Experian and TransUnion, tells banks and other credit providers to what extent they should lend, or extend credit, to a particular person.

Such borrowing includes taking out a contract with a mobile phone provider, a hire-purchase arrangement, a bank overdraft, a credit card, a mortgage, and so on. The greater the amount of credit you want, the better your credit score will need to be.

Where can I find my score?

All the agencies provide access to individual credit profiles, which can be viewed online if you sign up. Check here for full details of how to check your profile and score.

You should make it a habit to regularly check your credit profile, looking for errors and missing information, and to ensure your score is in good shape.

What is a good score?

The credit reference agencies use a numbering system to allocate a score. It is important to know that a ‘good’ score is different for each agency.

You want to aim for an ‘excellent’ score as detailed below: 

Equifax is 466–700

Experian is 961–999

TransUnion is 628–710

With an excellent score, you are more likely to be accepted for credit and be offered better (i.e. lower) interest rates. 

What affects my score?

Your credit score will fluctuate through time; it can go up and down due to factors in your full control. You can build your credit profile through a little self-discipline and patience. The more responsible you are with credit, the more likely you are to receive more and on more favourable terms.

Your credit score is made up is as follows:

35% payment history – you should avoid late payments. Details of late payments stay on your record for six years.

30% capacity – this is the proportion of debt you have to available credit. For example, if you have a balance of £7,500 on a credit card with a limit of £10,000, your capacity is 75% (7,500 ÷ 10,000 × 100). Ideally, you want capacity to be below 30%. 

15% length of credit history – having a credit profile, however modest, is better than having none.

10% type of credit used – you want to have a mixture of revolving (such as a credit card) and instalment (such as a personal loan) credit. Check here for definitions of these terms. 

10% new credit – you don’t want to have too many new credit accounts open on your profile; longer-standing accounts are preferred.

How can I improve my score?

If you have a low credit score, shop around for opportunities to build your credit score. Taking out a mobile contract, a credit card for people with a poor credit history or a prepaid card are good options to improve your score.

If you’re declined for credit, you should be patient and exercise good financial management to nudge up your score before reapplying. Rapid-fire failed applications will negatively affect your score.

Your income, your proportion of debt to income, and your bank balance don’t affect your credit score, so you shouldn’t despair.

However, you will need to keep your debt levels low. High debt is a warning sign to credit providers, so staying on top of repayments to reduce the balance is a great idea.

Remember

Your credit score is not to be feared. If you take full responsibility for your finances and take control, you can directly affect your credit score for the better.

More reading

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.

Credit card language should not be mind-boggling. Whether you have a credit card already and are trying to understand your statement, or in the process of acquiring one and struggling to take in the facts and figures, it could help to know and understand the terminology that is used by lenders.

With that in mind, let’s take a look at some of the most mystifying terms floating around. Below, we offer some easy-to-swallow definitions and a few examples from the real world.

Before getting the card

Annual percentage rate (APR)

This is an annual equivalent of the interest that a credit card company will charge you for any outstanding balances on your credit card each month.

The APR also includes any charges and arrangement fees that come along with your credit card. This means the APR can be higher than the basic interest rate.

Tip: APR is one of the key things to pay attention to when comparing cards, along with annual fees, introductory rates and incentives.

Balance transfer

A balance transfer card is one that allows the outstanding balance from other cards to be moved over. These cards may offer lower interest rates or 0% interest for a fixed period.

The amount you can transfer over is dependent on the amount of credit offered by the new credit provider. Often, the new credit card comes with a ‘balance transfer fee’ which is a small percentage of the balance you’re transferring.

Revolving credit

This is a type of credit, such as that offered by a credit card, where a certain amount of credit is made available to you. You’re not required to use all of it. As you do use it, you pay interest only on any credit you don’t pay back and carry as debt. And as you do pay it back, that credit becomes available again (thus, ‘revolving’!).

To provide a comparison, a personal loan is an example of non-revolving credit. When you take out a loan, you have access to all of the money at once, but you also have to pay interest on the full amount from the beginning. You know before taking out the loan how long you will be repaying the debt and how much the monthly repayments will be. As you pay back the debt, the amount of credit decreases. It doesn’t become available again as it does with a credit card.

When it comes to paying revolving credit on a month-to-month basis, you can pay back as much or as little as you like. To some extent at least. With a credit card, you’ll always want to pay at least your minimum payment to avoid fees and damage to your credit score.

Applying for the Card

Credit score

Your credit score is a rating to reflect how much of a financial risk you are. The score is assessed by the three credit reference agencies (CRAs), Experian, Equifax and TransUnion. The higher the score, the less of a risk you deemed.

Your credit score is used by the credit card provider to help decide whether you will be accepted or not. The score also influences the credit limit and the interest rate you will be offered. If you’re applying for a card with a 0% introductory period, your credit score may also affect the length of the 0% period you are offered.

Using the Card

Minimum payment

This is the minimum amount you must repay to your credit provider to avoid extra fees and being considered to have missed payments. The amount calculated is based on the balance each month, so the minimum payment may change each month.

Paying more than your minimum payment is a good idea, but paying at least your minimum payment is always smart.

Billing cycle

This refers to the period between the date of your previous credit card statement and the latest one. This could be 1st to 30th of the month, or 15th of one month to 14th of the next.

Dispute

If you think something is wrong on your credit card statement, you can dispute this with your credit provider. This may include an invalid transaction you notice on your statement. Your credit provider can freeze the transaction so you will not have to pay it whilst it is being investigated.

Default

If you are in default, you are likely to have missed several monthly repayments or breached your agreed credit terms.

In this situation, your lender has concluded that it’s no longer possible for you to get back on track with your credit agreement. The lender may accelerate what you owe – meaning that the full value of the debt could be due immediately – take court action or pass your debt to a collection agency.

Having a default on your credit record will affect your credit score. This will make it harder to get credit in the future (or, in some cases, get credit at all).

Being in default is definitely something you want to avoid!

More reading

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.

With the ever-advancing internet comes a vast range of financial and non-financial products available at our disposal. More choice usually means more competition and better deals for us. However, it can be easy for us to get lost in the online world, signing up for products without being fully aware of the impact they can have on our finances.

To help regain control, it is a good idea to create structure and stability, helping you stay afloat and secure. A personal budget and a finance plan are useful tools that help you do this. They help maximise how much money you have in your pocket, both now and in the future.

A personal budget and a finance plan are created to keep track of your income and expenses, with the aim of reducing spend, increasing income and tackling debt. If used correctly, they can be transformative for your household finances.

The information required to create a personal budget or finance plan is likely to be very accessible to you, making the process both easy and rewarding.

So, what are personal budgets and finance plans exactly?

Personal budget

A personal budget is a detailed list of your personal or household income and expenditure. It is usually a snapshot of the income and expenditure for a very short time period – usually a month – governed by your personal finance cycle (how regularly you get paid).

The budget works by adding together all your expenditure and subtracting it from your total income, leaving you with your net income. Your net income is your disposable income – the amount of money you have left after all expenditure has been subtracted.

Your net income is the starting point for improving your finances. First, we want this to be a positive number, meaning you have money left over after all expenses are paid. It’s then possible to identify where you may be overspending and where costs can be reduced. Finally, you can start thinking about paying off debts quicker or saving more. 

Your personal budget can be managed using a range of budgeting tools, such as an Excel spreadsheet. There are also many applications and templates available online for free or for a small charge.

Creating a budget is a great way start to taking responsibility for your finances, helping you free up more disposable imcome, reduce debt and improve savings. Check out our budgeting template to help you get started.

Personal finance plan

A personal finance plan is a step up from a personal budget. It allows for planning the longer-term future of your finances, such as a car purchase, a holiday or your retirement. The information used to create your personal budget is extended over a longer time period – usually 12 months – but it can be even longer.

A personal finance plan does require some forward-thinking. It is constructed using your long-term wants and needs. It is created to help provide structure to your future finances, so you’ll need to have an idea of what is to come. It also incorporates your personal goals and uses these to configure priorities and achievable timeframes for your targets set.

To summarise

A personal budget:

• Is a detailed list of your income and expenses
• Shows your net income (total expenses subtracted from total income) – a positive net income is what we want here!
• Is a snapshot of a short time period, usually one month
• Can be managed using a variety of tools (Excel, online apps, etc.)
• Is useful for clearly showing your cash flow

A personal finance plan:

• Uses the same starting information as a personal budget
• Allows you to plan the future of your finances
• Is extended over a longer time period, usually 12 months
• Requires forward thinking and personal goals
• Helps you plan for future financial commitments and targets

More reading

MyWallerHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.

A personal budget and a personal finance plan are great tools to help you organise and manage your finances. I personally know of many people who have completely turned their lives around as a result of taking responsibility for their finances and regaining control. 

A personal budget is a breakdown of your income and expenditure into a short, regular finance cycle – usually a month. It is used to track your income and expenditure to ensure you are on track with your budgeted spending and savings.

A personal finance plan is an extended version of the personal budget, in that the information used to create a budget is extended (usually for at least 12 months), adjusted for seasonal fluctuations and tweaked for goals and targets. It allows you to plan for the future of your finances and achieve your financial goals.

Below, we whizz through some of the key benefits of creating a personal budget or personal finance plan.

1. Create more cash

OK, so you may not necessarily ‘create’ more cash, but if you budget effectively, you will notice that you have more disposable cash. When you create a personal budget, you pre-determine the amounts you want to spend in various categories. It’s here that you’ll be able to spot opportunities to spend less.

If you become disciplined and stay on track with the amounts allocated, you’ll be far less likely to overspend, resulting in more available cash. 

2. Demolish debt

As you refine the money managing process, you can reallocate the money you’ve saved to tackling any outstanding debts. The process of creating a personal budget plan encourages you to check the status of any outstanding debt and your remaining repayment schedule.

With the increased availability of cash, you could take control of your debt and get it paid off. Once your debts are taken care of, you may find there’s extra cash available to top up your emergency fund, save or start investing.

3. Become more financially attractive

Using a budget or financial plan may not make you more attractive to your romantic partner, but it will definitely make you more attractive to lenders! Improving your money management could directly impact your credit score for the better.

Lenders may be concerned about your ability to repay loans and stay on top of bill payments. Making payments regularly and on time to reduce your debt and using no more than 30% of your available credit could contribute to an improved score. You may be able to access better interest rates and loan terms as a direct result of an improved credit score.

4. Build funds for a rainy day

An often-missed opportunity is the chance to put some of your income away to cover emergencies. Building an emergency fund can help in many ways.

Having funds set aside means you have the cash available to cover any unexpected costs that may arise. You also remove the need to borrow funds from a lender at the last minute, which usually come with awfully high interest rates attached.

5. Become a super saver

Once you start using your personal budget or finance plan, you are likely to identify some additional cash. This may arise from identifying cheaper utility providers, bulk buying opportunities, or taking advantage of discounts and deals.

You’ll have a better-looking net balance that can be deposited into a savings account. You could become a super saver by choosing the savings account that will work best for you. 

6. Be a boss at tackling irregular cashflow

A finance plan displays your income and expenditure over a 12-month period (or more). This means fluctuations in disposable income are clearly visible. Knowing that a specific month will incur a higher spend than usual allows you to plan ahead and avoid any possible shortfall.

7. Free up time to let your hair down

If your finances have been bogged down with setbacks, such as missed bills or a shortfall of cash, a finance plan can help alleviate the stress caused by a lack of control. Having a plan keeps you on top of your ins and outs, reduces stress and allows you to enjoy life more.

More reading

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.

Applying for a credit card can be a daunting process. And if you’re like most people, you may be worried about whether you’ll get accepted or not.

This makes sense, since no one has actually taught us how to apply for a credit card!

A credit card can be a great option and actually a smart decision. They can help manage your outgoing costs, allow you to earn rewards and help improve your credit score… to name a few. But, you will need to take stock and be honest with yourself. To be approved, you will need look as attractive as possible to lenders.

And bear in mind: Applying when your finances aren’t in order, or applying for a card that requires a higher credit score or income than your own, may cause more harm than good.

Lenders use the information provided by credit reference agencies to assess your risk level, decide how much you can borrow and what interest rate you will be charged. The lower the risk profile, the more attractive.

That may sound complicated, but fret not, there are lots of things you can do to achieve this, and in this article, I’ll break these down.

Below is your ‘To Do List’. Working your way through the following should help get your profile into tip top shape and ready to apply for a great credit card!

Pre-Application To Do List

1. Check and correct your credit report

Credit reference agencies are companies that compile information on how well you manage your credit and payments and give you a score. When you apply for a credit card, you effectively give the credit provider access to your profile, so we need to make sure it’s in great shape before they have a look!

The first step is to check your profile and ensure the information they hold is correct. You can do this using one of three main credit reference agencies.

Equifax

At www.equifax.co.uk you are able to view a free full comprehensive credit report online for 30 days, after which you will need to pay. A good score is over 420 out of 700.

Experian

Experian’s website offers a lifetime access to your profile, but only a 30 day trail of your comprehensive credit check, after which you will need to pay. A good score here is over 880 out of 999.

TransUnion

Checkmyfile includes Callcredit (newly named TransUnion) — along with Experian and Equifax — and offer 30 days access to your profile, at www.checkmyfile.com. A good score is 4 out of 5.

Once you’ve obtained copies of your credit report, you can get down to the work of checking them for accuracy. Below are the areas you need to check and, if any of the information is incorrect, you should contact the credit agency or relevant company to put it right:

• Your name and date of birth.
• The listed credit accounts. This included utility accounts, bank accounts, current credit card accounts. They will show if you’ve missed payments and the outstanding balance. Ensure to close those accounts that are no longer in use.
• Your current and previous addresses. In particular, ensure these are up to date.
• Whether you are on the electoral register for your current address.
• Your current-account providers, but only where you have an overdraft in use.
• Public record information such as County Court Judgments (CCJs). These are held on account for 6 years.
• Details of anyone financially linked to you. This will occur of you’ve opened a joint account, shared credit, or been a guarantor for someone. Credit agencies may check the associated partners credit profile when you apply for credit, as the association may affect your ability to repay debt.
• Fraudulent activity on your account. Keep an eye out for any unusual activity on your profile.

The credit report will not show your salary, student loans, council tax arrears, parking or driving fines, criminal record, or your medical history.

2. Keep up to date with payments

Missed payments, along with other negative remarks, appear on your credit profile for six years and have a damaging effect on your score. The longer a bill is left unpaid the more damage is caused, so it is in your interest to be on time.

You may find it useful to set up direct debits, so payments are made without you actively needing to process the payment. Paying on time shows lenders that you are responsible and capable of managing debt.

3. Keep debt levels low

If you currently hold debt, whether a mortgage, car loan, overdraft, store card, it is in your interest to keep the outstanding amount at a minimum. Credit issuers will check the amount of debt you hold to assess whether they are willing to offer more. Here, they are assessing your ability to repay your current debt and your requested debt.

Reducing the amount of debt you have will do wonders for your future borrowing. Understandably, repaying debt can be a time-consuming task, but it can really pay off. Doing so will help increase the chances you are offered the amount of credit you seek, and at a good interest rate.

To accomplish this, take time to draw up a personal debt repayment plan and stick to it. Be prudent with your spending and put energy into lowering your current debt. Paying more than the minimum payment speeds up the repayment process and reduces the amount of interest you pay.

4. Build credit

If you have not had credit before, it could be in your interest to get some. This may feel counter-intuitive, but it’s how the system works. It shows lenders that you can be trusted as you have responsibly managed debt before. You can start small, with low levels of credit.

If you haven’t already, you can start by opening a bank account and ensuring that it is well managed. If you decide to utilise an overdraft facility, try to stay within 25% of the limit and ensure to pay it off as quickly as possible.

You could also take out a mobile phone contract. And again, you must ensure you pay your monthly bill on time and manage spend.

Finally, if you need extra help, for example if your credit score is very low, it may be useful to apply for a credit building credit card first or a prepaid card. These are offered by lenders such as Aqua, Barclaycard, Vanquis, Capital One, Pockit, Optimum, and Virgin, among others.

5. Limit the number of credit applications

Applying for credit leaves a footprint on your profile. If your profile shows multiple searches carried out in a short space of time, lenders are less likely to offer credit.

There are two types of searches, ‘soft’ and ‘hard’. A soft check is a check carried out by a lender to cross check the information provided and to see whether you will be accepted. This type of check is not visible to other lenders and does not affect your credit score. Only you can see these on your profile, therefore the amount of these carried out has no effect.

A hard check occurs when a lender performs a full credit check on your profile. These searches are visible to other lenders performing checks on your profile, so all can see how many times you have applied for credit. Having too many leaves a negative mark on your profile and can lower your credit score. Hard checks are performed when applying for a mobile contract, a loan, applying for utility credit, and so on.

To reduce the number of hard credit checks performed on your profile, you should keep the number of credit applications low. It is also beneficial to leave at least three months between applications.

6. Pre-check whether you’ll be accepted

Here you are testing the waters! It can be useful to find out whether you will be accepted for credit before actually applying. This can be done via a number of companies. They will perform a soft check on your account and can provide a percentage likelihood of acceptance. These are offered by many companies including Experian, Halifax, Barclays etc.

7. Finally, chose a credit card fitting to your circumstances

Here is the last tip from me to ensure you are heading to a successful credit card application and healthy personal finances. The current market has a large range of credit cards available, nicely packaged to fit different personal needs, which is great. This means you are able to really pin point the best card to satisfy your needs and achieve what you set out to do.

With that in mind, it’s a good idea to take the time to identify what type of credit card best suits your personal circumstances and credit profile. For example, if (after completing the steps above), you find you still have a low score, you’d have a better chance qualifying for a credit card that helps people with lower scores, like Aqua, rather than a card from an issuer like American Express, which is mostly aimed at borrowers with high credit scores.

Also, as stated earlier, remember to pre-check credit card acceptance, this is a really great tool. You may also find it useful to have a read of articles explaining the various credit cards products available on the market.

Summary

The above offers a range of tasks to be completed before you go ahead and apply for your credit card. Following them all through could both improve your credit score and improve your personal financial skills — a two in one!

As you may have noticed, some of these aren’t tasks that you start on a Tuesday and finish on Thursday. So get started as soon as possible, as it can sometimes take some months to see an improvement. Be patient and enjoy the journey though, and ‘well done’ in advance!

More reading

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.