Do you know the importance of your credit score? Many people never consider their credit score until they need to borrow money, which could make life difficult if your score is not the best. Essentially, a credit score is your creditworthiness and demonstrates how reliable you will be as a borrower. Therefore, if you want to get approved for a mortgage, arrange car finance or take out a loan, a lender will look at your credit score to make a decision.
How is Your Score Calculated?
Your credit score is calculated by looking at your credit history, which can include things like debt and repayment history, accounts open, credit utilization, missed payments and CCJs as just a few examples. There are three credit reference agencies in the UK; TransUnion, Equifax, and Experian. Each agency has its own method for calculating your score and has different scoring systems, so there is not one final credit score per person. However, regardless of which agency you are referring to it’s always worth viewing it as the higher your score the better.
What Does it Mean if I Have Bad Credit?
Many people panic when they check and find that they have a bad credit rating. While it might make it challenging to borrow money at that specific time, you can change your credit score although it can take some time for results to show (this post will explain how later). Although borrowing options are limited, you can still apply for a loan for emergencies as some lenders offer products for those with bad credit ratings.
What Effects Your Credit Score?
There are a number of things that can affect your credit score. The four worst things for your score include making late payments, defaulting, CCJs and not being on the electoral roll. Other factors include minimum payments, high credit utilization, frequent applications for credit and taking out cash on credit cards. Additionally, financial links to someone with a bad score can harm your own. Additionally, mistakes on your file can negatively affect your score, which is why it is a good idea to check periodically.
How Can I Improve My Score?
There are many ways to improve your score, but keep in mind that it can take some time, so you should always check your score well in advance of applying for credit. Simple ways to improve include checking the report for mistakes, getting on the electoral roll and closing unused bank accounts. You then need to start developing positive habits, including making payments in full and on time and using low credit utilization. You should also limit applications for credit and only apply when you are confident that you will get approved.
Hopefully, this post will be informative and help you to understand the importance of your credit rating as well as give you some ideas on how you can improve your score if needed.