Many people don’t realise the impact that credit scores can have on their financial life. Many people think that your credit score is just about getting accepted for loans or not, but your credit score can impact many other factors too.
Better credit scores usually mean you can benefit from better rates and higher credit limits. Your score helps potential lenders to see which type of borrower you are, based on your credit accounts and a number of factors. Let’s take a look at why your credit score is important and how to keep it healthy.
What is a credit score?
A credit score can be found on your credit file and is an indication of your creditworthiness. Your credit score is calculated by a number of factors but can reflect your previous financial behaviours.
In general, the higher your credit score, the better you look to a potential finance lender as you are less of a risk. Credit scores are all about risk and prediction. The risk it poses to the lender to lend money out and the prediction whether the customer will pay the loan back or not.
How can you check your credit report?
You can check your credit score for free by using a credit referencing agency. In the UK, there are 3 main credit referencing agencies, Experian, Equifax and TransUnion. Each credit score will be different but it’s best to check all three to make sure all your information is accurate and up to date.
If you see anything on your credit report that doesn’t look right, you can contact the credit referencing agency to dispute it. It is recommended that you check your credit score before any finance applications to see where you fall on the credit scale.
Which factors affect your credit score?
Your credit score is really important when it comes to your financial life. It’s important that you look after your credit and try to keep it as high as possible. There are a few factors which you may not be aware can affect your credit score.
One of the biggest factors of a good credit score is your ability to meet repayments. Missed or late car finance repayments can lead to defaults on your credit accounts, CCJs against you and even bankruptcy. All of which can have a detrimental effect on your credit score and your ability to lend in the future. You may then be more suited to lenders who provide car finance for poor credit and may receive higher interest rates.
Amount of credit
Potential finance lenders can also view how much current credit you have. Having high levels of existing debt or credit can put lenders off as they may assume you can’t handle any more credit.
Length of credit history
Not having any credit history or having little credit can affect your credit score. Many people assume that having no credit means they have good credit however this is strictly not true. Never taking out finance means lenders don’t know what type of borrower you are.
Type of credit
Lenders like to see applicants who can handle a mixture of credit. Having different types of credit such as car finance, credit cards, mobile phone contract and store cards and keeping on top of payments each month can help to increase your credit score.
How to improve your credit score
If your credit score is a little on the low side, you’ll be pleased to know your credit score can be rebuilt.
Make payments on time
If you’ve missed payments in the past, it can be hard to get accepted for finance. You could set up a direct debit for any payments you need to meet, this way, you won’t forget! Showing a long period of time of meeting repayments can help to increase your score.
Build a credit history
If you’ve never taken out finance before, you could consider building a credit history. Even something as small as a mobile phone contract in your name and paying if off each month can help to increase your score.
Fix any mistakes on your credit file
Having information on your credit file which is inaccurate or incorrect can negatively impact your credit file. You should also check the finance applications listed on your credit report and make sure they all look familiar. If not, you could have been the victim of a fraudulent application in your name.
Get rid of any negative financial links
When you take out finance with someone else, for example, a joint car finance deal, you will then become financially linked. If you no longer have any active finance with someone who has bad credit. It’s best to disassociate yourself from them on your credit file. This is because their negative score can be harming yours too.
Reduce any existing debt
Having high levels of existing debt can affect your approval rate and also the rates you have access to. Having a lot of debt already may mean lenders off you lower lending limits as they may think you can’t handle any more. It’s best that you try to pay off debt before you start applying for other forms of credit or finance.