A good credit score is vital to having a successful future. This is because it gives you more negotiating power, a better chance of loan approval, low-interest rates, easier approval for apartments and much more. On the contrary, bad credit makes your life costly. And stressful because you are given a small credit limit, charged higher rates and sometimes, your loan request is rejected. The good news is that bad credit does not last forever and there are things that you can do to improve your credit score.
A credit score is a 3-digit number that evaluates your creditworthiness and summarises your borrowing history. Lenders such as credit unions and banks use credit scores to determine the risk involved by lending money to a borrower and minimise losses caused by bad debt. Lenders use credit scores to find out who is eligible for a loan, the credit limit of a borrower and the interest rates to charge a person.
Additionally, organisations such as government departments, mobile phone companies, landlords, and insurance companies use the credit score to calculate a borrower’s creditworthiness. Companies will also check the credit rating of a customer before doing business with them, especially when products or services are given in advance.
Most Americans have a credit score ranging between 300 and 850 because most lenders in the US use only one credit scoring system to assign credit scores. However, in the United Kingdom, a lender cannot find out your likelihood of paying your debt with the use of a single credit score. Therefore, lenders use your credit file information held by credit reference agencies such as TransUnion, Experian, and Equifax to calculate your score.
According to Equifax,
0 - 279 is very poor
280 - 379 is poor
380 - 419 is fair
420 - 465 is good
466 - 700 is excellent
According to TransUnion,
0 - 550 is very poor
551 - 565 is poor
566 - 603 is fair
604 - 627 is good
628 - 710 is excellent
According to Experian,
0 - 560 is very poor
561 - 720 is poor
721 - 880 is fair
881 - 960 is good
961 - 999 is excellent
In the UK, credit score checks are provided for free. To do a quick credit score check, begin with your credit card issuer or bank. Various financial institutions offer free credit scores to their customers and all you are required to do is to check the app or log in online to find out your scores. If your credit card provider or bank offers free credit score checks, you do not have to find a new service unless you need a credit rating check for your company or any other type of service that they do not provide.
If you cannot get the score that way, you can research other sources that provide free credit score and credit rating checks for free.
If you have a low credit score, you can use the following ways to improve your credit rating:
Credit reference agencies and prospective lenders will use this to find out who you are and where you live. The reason as to why being registered on the electoral roll improves your credit rating is because lenders can confirm that you have provided accurate information. The interested parties can also confirm your identity and avoid problems associated with identity theft or fraud.
Paying your bills on time and ensuring that your balances remain low are the most important factors of building your credit. Your payment history is one of the crucial factors making up your credit score. For this reason, Late or missed payments can remain in your credit report for up to 6 years. Besides, lenders look at your payment history to find out if you are a responsible borrower or not.
The credit utilization ratio is the outstanding credit card balance that you have on your credit limit. It is the amount available on your credit limit. To elaborate, if you have a credit limit of £5000 and use £2500, your credit utilization will be 50%. Lenders prefer those with a ratio of less than 30% because it shows that the borrower knows how to manage their credit.
You can apply for credit building credit card if you have a poor credit history. The card will have a low credit limit and a high-interest rate. This is because the lenders still see you as a high-risk borrower. However, by using the credit building credit card to pay off your monthly payments, you can prove that you are creditworthy, improve your credit rating and apply for other types of loans and cards after improving your credit rating.
Remember that making repayments on time is what will help you to improve your score. When choosing a credit repair company, it is recommended that you select one that is not overly pricey. Also, watch out for those who promise quick results because some of those firms are scammers.
One late payment can have a devastating impact on your credit score. So, make sure that your report is correct. If you find any errors, you should report it to the agency so that they can raise a dispute for you.
A shared credit account means your credit report information is linked. This happens in joint credit accounts or joint finances. When you apply for credit such as a loan or mortgage with your spouse, you will automatically be financially associated with them.
Your financial associates will affect your loan eligibility. This is because lending companies may check your partner’s credit history before approving your loan. The creditors will assume that if, for instance, your partner has been made bankrupt, you will need to help in repaying their debts before you can make a payment on yours.
It is difficult for companies to assess you if you have little or no credit. Young people or those who have relocated into a new country may have no credit history, thus having a low credit score. You can build up your credit history by taking a credit card and making on-time payments each month.
(Except if it’s a specialist credit card for spending abroad)
Withdrawing cash on credit cards is expensive because you are charged interest even if you repay in full on time. But most importantly, it damages your credit score, because banks and lenders consider it as poor money management.
If you are able to, take out a credit card with the sole purpose of spending small amounts and paying it back in full each month. Not just the minimum required payment. Unused credit cards show on credit reports as an available credit. But it’s often seen as a negative thing by lenders. If you spend little and regularly, and pay it back on time each month, it will improve your credit rating. It shows lenders you are responsible. Be sure to pay more than the minimum required, to show you have enough to spare. It boosts your credit rating and also saves you money on interest.
Last and certainly not least...never miss a payment! You may already know this but when you miss a payment it can affect your score dramatically. Missing payments can sometimes stay on your credit file for a few years so do your best not to miss any. We would recommend paying all your debts and bills by direct debit each month, this way you will never be late or miss a payment. If you find you are struggling to make the repayments, please contact your lender to seek help.