A credit score is a numerical number used by lenders to identify whether you qualify for loans, credit cards, or mortgages.
The main purpose of a credit score is to help determine what kind of borrower you are.
A high credit score means you are likely to be a good borrower. Whereas a low credit score highlights that you may be a poor borrower, and as such might have issues managing your repayments.
Why Is Your Credit Score Important?
Lenders use the score as an indicator of risk, and will use this to make decisions about your loans. Your credit score is therefore important because it can determine whether your application for financial products gets accepted.
The higher your credit score the better – lenders are more likely to offer you financial loans if you have a high credit score. The score will also influence what deal or interest rate you are given. Again, the better the score, the more likely you are to receive a sweeter deal.
Even if you’re not planning to apply for any financial products, understanding your credit score is still important. Finding out that you have a low credit score might give you a little panic, but understanding why it’s low is the first step to figuring out how to improve it!
What Can Negatively Impact My Credit Score?
Not managing your money very well can lead to a poor credit score. Missing a credit card payment, or bill can also negatively impact your credit score.
But, your score is not fixed, and depending on how well you manage your finances, it is possible to improve it.
What Can I Do To Improve My Credit Score?
One of the first things you can do to improve your credit score is to make sure you are registered on the electoral roll. This helps lenders to identify your name and address. (And is one of the easiest ways to see your credit score improve)
Making sure you pay all your bills on time can also help to boost your credit score. This includes all bills, not just credit card repayments.
Setting up a separate bills account can help ensure you never miss a bill. At the start of each month move enough money to pay your bills into this account and then arrange to pay them all by direct debit.
If you have any debts, paying off more than the minimum amount will give lenders the confidence that you can manage your money. Remember, the game is about showing lenders you’re a reliable customer, who is able to make repayments in time.
Likewise, not having a record of any borrowing can also work against your favour. Credit scores look at your past behaviour to determine future behaviour – which is tricky if you don’t have any credit history. Look to build some credit history by selecting one area of your spending to pay on a credit card. For example, you could use a credit card to pay for your petrol or your train fare. Paying this off every month in full shows lenders that you can manage the repayments, whilst giving you some credit history.
Closing any old credit cards can also help to improve your credit score. If you don’t use them anymore, you don’t need them – and they’ll have a negative effect on your credit score. Speak with your credit card provider and if there is no balance on the card, make sure you close it.
Credit Score Myths
One of the biggest misconceptions about credit scores is that checking your credit hurts your account. As long as you use a credit score service and not a mortgage lender it won’t do any harm. You can check your credit score as many times as you like. Although, you probably don’t need to more than once a month.
It’s also a myth that you only have one credit score. Everyone can have multiple credit scores because there are multiple credit scoring systems.
Some people also think that having lots of money in their account will mean they have a great credit score. Wrooong. Your bank balance isn’t taken into consideration when calculating your credit score. If you haven’t paid your bills on time, you’ll have a poor credit score, regardless of how much money you have.