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Credit scores, credit history and other buzz words are enough to put anyone off of finance. Until you zoom in and look at what your credit score actually means, having a good or excellent score can make all the difference.
You will find that you have more opportunities to get accepted for loans and be offered lower interest rates and monthly repayments with a better score. Whether you want to finance a new car, buy a sofa or get your hands on the next-generation smartphone, the retailer will want to know that you can make your repayments before letting you walk away with the goods.
Want to understand your credit score? Read on to find out more:
What is a credit score?
Your credit score appears as a three-digit number that may not look like much, but it is an indicator to lenders that tells them how good (or bad) you are at borrowing and paying back your loans on time.
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Any time you apply for a loan, a credit reference agency will compile information about your financial history and generate a credit score based on their report. So the higher your score, the better interest rates you’ll be offered. It will also impact how much you can borrow.
Credit score ‘impacters’
So we know that your credit score is a reflection of how you’ve managed your bills and equally your debts in the past, and every repayment you’ve made on time will have left a positive impact on your score.
Equally, a history of missed or late payments leaves a negative impact. Then, there are those that have never borrowed money before, who automatically tend to raise a red flag for lenders. With no credit score to back up your borrowing and repayment habits, lenders have little to no information to assess the risks.
But what is included in your credit report? Let’s take a look:
- Your history of credit repayment from the last six years – this includes any missed payments
- Every credit agreement you have from loans to credit cards, even the ones you hold jointly with other people
- All your public records such as your details on the electoral roll and Couty Court Judgements (CCJs)
Bear in mind, your credit history and report will only ever include your financial information at a glance. Things such as your salary or medical history will never be included.
How “creditworthy” are you?
Credit scores and credit rating are both used by lenders to decide how ‘creditworthy’ you are.
Using data supplied by the big three credit reference agencies – Equifax, TransUnion and Equifax – the lender will assess how risky you are as a customer through their own series of methods and tools.
Ways to boost your credit score
Time and patience are key to you boosting your credit score. There is no quick fix, but there are several ways you can boost your credit score, including:
- Registering on the electoral roll: straight away this helps companies to comfirm your identity, simply from you keeping your current address details up to date on the electoral roll
- Build up your credit history: Whether you have little or no credit history, or need to show that you can make your payments on time despite your checkered past (check out poor credit car finance as an example), building up your credit score will help secure better finance opportunities in the future. Check online for a list of starter credit cards to try.
- Make sure you make your payments on time: simply paying off your balance in full each month, and on time will show lenders that you are worth lending money to as you can handle credit responsibly
- Maintain a low credit utilisation: if you are able to use a lower percentage of the credit limit available to you, then your score will likely go up as a result. Anything below 25% is a positive – so if your limit is £2,000, cap the amount you use to £500
How to keep your credit score healthy
Now that you’ve put in the work to help boost your credit score, there are a few things you can do to keep your report looking healthy:
- Keep up with your payments: a no brainer really! Like we’ve said before, any missed or late payments will automatically damage your score and your account will be labelled “delinquent” as a result. This is where a default will occur on your credit report, as it shows other lenders that your relationship with the company you were borrowing from has broken down due to a series of missed payments. So avoid missing payments where possible!
- Keep your credit applications down to a minimum: While it’s tempting to apply for as much credit as possible, doing several in a short time will only show lenders that you are too reliant on credit, and therefore a higher risk applicant. Although it’s fine to compare prices online through soft searches as these don’t appear on your credit report, going through to the application stage is a hard search. Companies can see this, so try to avoid making too many applications!
- Only borrow what you know you can afford to pay back: It’s more damaging to live beyond your means and get into trouble with debt, than it is to not break the bank! Landing a CCJ, IVA or bankruptcy will leave lasting damage up to six years on your score
- Check your credit report regularly: Your credit report is yours, so feel free to check it regularly! That way you can keep an eye on any fraudulent activity or any details that aren’t correct. If you spot a red flag, get in touch with the lender or your bank so they can assist you further
- Let go of unused accounts: If you are no longer using an account, close it down. If lenders think your available credit is too high, they won’t want to give you any more!
Having a good credit score can open up a whole world of opportunity to you. From getting access to the latest cars, a better phone contract or improving your home furnishings, there’s a lot you can do with the flexibility of credit. But, knowing your limits will not only help you to keep your finances healthy, but it will also help you to build a great credit history!
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