Your credit score affects a whole range of things within your financial life. When you have high levels of debt you may think it’s impossible to rebuild your credit score, however this isn’t strictly true. Improving your credit score does take time and effort and having a low credit score shouldn’t hold you back from applying for different types of loans in the future. For example, if you are applying for bad credit car finance, you may think it’s impossible to get accepted without sky high interest rates. These days there are many options for people with bad credit, but it’s best to work on your credit score before you start applying! So, can you improve your credit score when you are in debt?
How can I reduce debt?
Before you start rebuilding your credit score, you should try and reduce the amount of debt you have to make it easier to rebuild. Part of your credit score is based on the amount of debt you have so one of the best ways to increase it is to reduce your levels of existing debt.
- Don’t create more debt. This won’t reduce your debt, but it can stop you from getting into more debt. You won’t make much progress if you are paying off your debts whilst also building it up and this can be a slippery financial slope.
- Use your savings. Although it can be hard to have a savings account when you have debt, it’s a good idea to use your savings account to pay off or reduce your debts.
- Don’t make the minimum repayment. Making the minimum repayment each month on credit cards can be detrimental. Minimum repayments are designed to keep you locked in and can increase your interest rate over the years.
Check your credit file
The first thing you should do before starting to rebuild your credit score is to check your credit file. You may not even be aware of your current credit score if you’ve had high levels of existing debt for a while. Many people tend to avoid checking their credit score, but it can be really insightful. You can check your credit score online for free using a reputable credit reference agency such as Equifax, Experian or Credit Karma. Using these services will not harm your current score and enables you to check your full credit file and see your financial history. Make sure there are no mistakes on your credit file and all your information is up to date. Even an incorrect address can harm your credit score!
Disassociate yourself from financial partners
When checking your credit file, you should also check for any financial links. If you have taken out credit or finance in the past in a joint application, this will be recorded on your credit file. If you no longer need to be financially linked to a partner or your credit agreement with them has ended, it’s best to disassociate yourself from them. This is because their bad credit score could be affecting yours and can negatively impact it.
Keep credit utilisation low
If you’ve taken out any sort of credit, you’ll know that you have a maximum credit limit. Your credit utilisation is the percentage of your credit limit that you use. If you have a credit limit of £1000 and you have used £500 then your credit utilisation is 50%. It is recommended that you keep your credit utilisation low and if possible, below 25%. This indicates to lenders that you are capable of keeping on top of your finances.
Pay all your bills on time
This one can be tricky if you have high levels of debt. However, it can massively impact your credit score. You have had trouble in the past making repayments on time and in full but even just a few months of paying your bills on time can increase your credit score. You should then make sure you keep this up to show potential future lenders that you can make your payments on time. It can be useful to set up your direct debits the day after or a few days after you have been paid to make sure you don’t miss any payments. You could also use calendar reminders or notifications.