Credit scores define our lives, and as unfortunate as it sounds, it is true. Whether you plan to borrow money, get a job, rent a flat or even renew your car insurance, those three little numbers can make all the difference. In the UK, credit scores are provided by the three primary credit rating agencies (CRAs): Experian, Equifax and TransUnion.
Your credit score is calculated based on a number of factors. Credit scores signify your creditworthiness and indicate to lenders whether you can be trusted to repay the borrowed money. Landlords, insurers and employers use this data to determine how likely you are to default on rent or make wrongful choices. Someone with a high credit score is considered low-risk; the lower your credit score, the higher your perceived risk.
However, if you have a poor credit score, all is not lost. If you are facing an emergency and need immediate financial aid but find that all your loan applications are getting rejected, you could apply for a Salad loan. They are more flexible with their approval process, making them a great option for emergency borrowing.
But in the long term, it’s best to focus on building your credit score. Here’s how it’s possible to improve your credit rating.
1. Pay Your Credit Card Bills on Time
About 35% of your credit score is dependent on whether you have paid your previous credit card bills on time. Even a single missed payment can hamper your score, and these negative marks can stay on your credit report for about 6 years.
It is ideal that you pay the minimum amount on time so that your credit history isn’t impacted. If you don’t do that, it sends a signal to lenders that you don’t know how to manage your finances and might not consider giving you a loan.
If you can’t make even the minimum payment in a month, you should contact your bank to see if they can move the date. This prevents you from defaulting. However, this method should only be used in emergencies.
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2. Keep Your Credit Utilisation Low
It is good practice to avoid using more than 30% of your credits. If your credit limit is £2000, you should keep your spending to £600 or less. When you consistently utilise more of your credit, it indicates that you are financially overextended, and this might impact your credit score.
You should also consider paying off your credit cards in full instead of only paying off the minimum balance. This will ensure that you are not consistently adding to your expenses.
Furthermore, it’s not advisable to take out multiple credit cards to pay off your debt or to keep your credit utilisation low. Every loan and credit card application is followed by a credit check by the bank or lender, and it shows up on your credit report.
3. Don’t Close Your Older Credit Cards
When the CRAs check your credit history, they look at all open credit cards and debts you might have. In the case of credit cards, they check how long you’ve been using credit. If you close an old credit card and open a new one, your credit history with that account resets, starting from the date you receive the new card.
To maintain a positive credit score, maintain your older cards, make smaller transactions on them and pay them off promptly.
However, you might reconsider if the credit card has high fees or charges. Closing it might negatively affect your credit history, but it saves on unnecessary fees.
4. Limit Opening New Credit Cards
You might think that opening multiple cards shows a wide history, and if you pay them off on time, it will assure lenders of your creditworthiness. However, every time you apply for a credit card, the lender will run a hard credit check. If multiple hard credit checks are conducted in a short period of time, it will make you seem in great need of financial assistance and make the lenders wary of your intentions.
A hard credit check inquiry remains on your credit report for 12 months. Lenders usually prefer giving out loans to people in control of their finances. This is why limiting the number of loan or credit card applications is a good practice.
5. Check Your Credit Report Yearly
Did you know that even a small error or discrepancy in your credit report can get your loan application declined? A yearly credit report check will ensure all the details are accurate and that there are no fraudulent activities on your account (a loan application you cannot recall).
If you notice any error, you must immediately notify the CRA and get it changed. Banks run a hard check on your report when you apply for credit, which also contributes to lowering your credit score.
It is far from ideal if your lender runs a hard check, and yet your loan is rejected because of technical errors.
Summing It Up
A good credit score helps you get competitive borrowing terms from banks and even favourable schemes from your mobile provider. However, you should also remember that your credit score will not increase in a day or even a year. You need to make a consistent effort to see the result. In case of emergencies, while you are building your credit score, you should consider a payday or emergency loan. Timely repayment prevents debt from reflecting in your credit score. Having an emergency fund and budgeting will also help you in the long run.
Making thoughtful changes to your credit history today will lead to better financial opportunities in the future.
