If you want to borrow money, your credit score rating is one of the most important factors lenders will consider.
But what if you have a poor credit history, or just want a better rating? Below offers some information on what you can do to improve your score.
How Is Your Credit Rating Scored?
Lenders look at the ‘risk’ of a debtor not paying them back. Your credit score is a way of assessing the risk of this happening. When a lender decides a debtor will not or cannot pay them back, the debtor is known to have ‘defaulted’ on the loan.
For your lender, your credit score is a way of judging your ability to handle debt. If you borrow money and can make the payments on time, for example, your score will reflect this. A lender will judge your ability to pay back any money you borrow from them more favourably.
Your score is a number that relates to your financial history. Each credit reference agency’s score criteria is different, but generally, a higher figure means the stronger your financial history.
And your credit report forms part of any application when you’re applying for credit.
The Differences Between Your Credit Score and Your Credit Report
Your credit score is a numerical figure with an attached ‘rating’ usually from ‘very poor’ to ‘excellent’. It gives lenders a glance look into your financial history.
The largest credit rating agency in the UK is Experian, which rates you from 0 to 999 with 999 being the best. An Equifax credit report ranges from 0 to 700, with 700 being the highest.
As an example, Experian’s categories are very poor, poor, fair, good, and excellent and to be excellent, you’ll need to be in their 961-999 range. An Equifax Excellent rating is between 466 and 700.
Don’t worry about the differences though, as ratings are based on your personal payment and credit history and are reflective of each system.
Your credit report is a much more detailed look at your financial history and gives details on things like bank accounts, loans, and credit cards. And if you’ve had any payment problems, your credit report will show it.
Most lenders use their own criteria too. And it’s worth noting a positive credit rating does not guarantee you’ll be accepted. Equally a poor score won’t necessarily mean you won’t be accepted.
‘Thin’ Credit Scores?
A thin credit score is where you have little or no credit history on which a lender can base their decision.
Unfortunately, this means your options might be limited because when creditors don’t have much information on your credit history they have to adjust the loan to consider the risk, in the event of missed payments or default. This might potentially mean higher interest rates to mitigate the risks.
What Affects Your Credit Score?
Defaulting on a credit agreement altogether is naturally going to have a huge effect on your score. And missing payments is often one of the most frequent factors in a lower credit score. This can be avoided by simply setting up a direct debit. But what else affects your score?
- Late payments
- Often being over your credit limit
- Frequent cash withdrawals from your credit card
- County Court Judgements
Personal factors can affect your score too. Being absent from the electoral roll, moving house frequently, and holding a joint account with someone who has a poor credit score can all affect your credit score.
But if you do have a credit score you’d like to improve addressing issues such as these will help.
It’s especially important if in the future you’ll be looking for high-finance loans such as mortgages for bad credit or home improvement loans. Your score will be improved greatly by simply making payments on time. And while you should use a credit card every so often but stay within your credit limits and avoid cash transactions on your credit card. Try to make more than the minimum monthly payment. Avoid payday loans and ‘Buy Now Pay Later’ schemes.
If you’re constantly at the limit of what you can borrow, try to reduce it.
Some Final Thoughts
Your score is affected by various elements of your financial history, but the score isn’t fixed and will change depending on how you manage your financial affairs.
Even the smallest of changes will start to improve your credit score.
Interesting Related Article: “How to boost your credit score: a 101 guide“