Everyone who desires financial stability should be striving to spend less than they earn, build savings where possible, and pay down their debt. But these financial pieces of advice aren’t all you need.
In order to make purchases and other financial decisions, society is growing increasingly reliant on credit. A strong credit score might help you secure more than a credit card or a loan.
Solid credit history is one factor that lenders consider when approving your application. It shows how well you have paid off obligations owed to financial institutions. You need to understand what factors affect your credit score and how to improve it.
It’s best to start boosting your score sooner rather than later. Whether you’ve just been denied credit or merely wish to apply in the future, a higher report will help.
Why is your credit score important?
Credit scores are a vital component of financial health. They affect your ability to get loans and credit cards, among other things.
With a higher rating, your approval for loans and credit cards will improve, and you can find better terms and lower interest rates. You will also be able to get higher limits on credit cards when approved.
Experian, one of the top credit reporting companies, reported an improvement in the average UK record from 792 in 2020 to 797 in September 2021. Each of these scores sits within the fair range.
Living
Credit impacts more than just mortgages and other loans. Even property rentals can change depending on whether or not you have a good credit score.
Mortgages
A high credit score suggests that you are trusted and won’t default on your loans. This encourages mortgage lenders to consider you.
And the effects of a credit score don’t end there. If you get approved for a mortgage, your score can still greatly impact the interest rate you are offered. Those with lower scores will likely only be approved for lending at a higher rate, while those with better scores can enjoy far lower interest rates.
Interest gathers over time, and even a minor difference can ultimately amount to several thousand pounds.
Renting
Landlords want to know that they will receive payment. A bad credit score may suggest that you are less likely to pay this money and overall that you are more of a risk compared to someone who has proven they can make payments regularly and on time.
Employment opportunities
With our increasing reliance on credit, it is even becoming more common for employers to run credit checks on their employees to see if they can be trusted with company cards and finances.
A poor credit score may alter whether an employer picks you or another candidate for a job, or it could affect the type of responsibility they are willing to entrust to you.
Vehicles
You will probably still be able to find a rental, even with a lower credit score, but you may find that you need to pay a higher deposit or even have a guarantor sign for you in the contract.
As the world relies more and more on credit, we are seeing a shift in the way we make purchases. For instance, auto loans have become increasingly popular over the last few years.
Many people cannot afford to pay thousands of pounds for a car upfront, and this is where auto loans come in. Whether you need a more family-friendly car or something more reliable for travelling, an auto loan can help you get the vehicle you need without having to first save for months or even years.
But, not everyone can get a car loan. If you have a poor credit score, your chances of approval will drop rapidly. Similarly, a lower score will increase the interest rates loan companies ask you to pay, and a higher one will decrease them.
Business loans
For those who have been hoping to start their own business and need some extra capital to start, good credit is essential. One of the first things small business loan lenders will check for is credit. These loans are typically only given to those with high scores to reduce the risk of defaults.
Utilities
Even registering for utility bills can require a good credit score. If you don’t have one, the company may request you put down a deposit to set up services to mitigate their risk should you fail to make payments as and when you should.
How your score is decided?
Before you can change your credit score, you need to understand how it is determined. This knowledge will help you make wise decisions and choose the most effective route to improve your ratings.
These are some of the main factors that alter your creditworthiness:
- A history of missing or late payments
- Spending beyond your credit limit
- Defaulting on credit agreements
- Bankruptcies, County Court Judgements, or other insolvencies on your record
- Attempting to make too many credit applications in the same time frame
- Having joint accounts with someone with a bad credit record
- Frequently withdrawing cash from your credit card
- Errors or fraudulent activity on your credit report that hasn’t been detected
- Not registering for the electoral roll
- Moving house frequently
How to check your credit score
Reports are compiled by credit reference companies. The UK’s top 3 include Experian, Equifax, and TransUnion.
By law, you are permitted to check your credit report once a year for free. There are also several credit monitoring applications and services available, some of which cost and others that don’t. These allow you to keep track of your credit over the year.
What can you do to improve your score?
Regardless of how excellent or poor your credit score is, there are usually things you can do right now to enhance it. Some are completely free and only take a few simple procedures, such as registering to vote. Others, such as altering the way you manage your expenses, will take a little longer.
If you don’t have a very high credit score and are approved for a loan or credit card, you can use this as an opportunity to boost your finances. Make on-time payments and demonstrate financial stability, and your credit limit may be raised after 6-12 months.
Many parts of our lives rely on credit. A bad credit score can get in the way of many dreams, needs, and comforts.
You must get to know what your score is and why. This understanding will help you improve it and go on to get the best terms, rates, and range of credit cards, loans, and other opportunities.