When it comes to managing your money, your credit score can play an important role in your financial life. Your credit score is an important factor that you need to consider, as it can determine whether you can finance a loan for a car, start a business, rent a property, or even purchase your first home. The better your credit score, the better your chances are at securing any of these things. If you do not have a good credit score or are new to the whole concept, then, fortunately, there are plenty of things you can do to get your credit score in a good position.
Here is the information you need to help you get started.
What is a credit score?
A credit score is a number that determines your creditworthiness, based on your credit history, for example, the amount of debt you have, your history of repaying credit, and a range of other factors. The number is usually scored between 300-850 and is based on the Fair Isaac Corporation (FICO) which is the most commonly used formula across all industries. The score is used by lenders, and the higher the score, the better your chances are of borrowing money as they will consider your score as the probability of being trusted with the money and your ability to repay the funds. If you don’t have a great credit score, that doesn’t mean you cannot borrow any funds at all. It may just mean you have a different product, a higher deposit needs to be paid or a higher interest rate is offered to you. There are also plenty of companies that will lend you money, such as Wise Loan, which offers loans to those with good and bad credit scores.
As a general rule of thumb, scores over 700 are deemed very good, scores between 500 and 700 are average and 300 to 500 are deemed poor. The better your score, the more you can benefit from lower interest rates, competitive rewards, luxury perks, and much more. However, just because you have a good credit score, it doesn’t guarantee that you will be approved, as lenders will also consider other factors such as your income, your outgoings, and your circumstances relevant to the product you are applying for. If you have a poor score, it doesn’t mean you cannot do anything. You will need to spend more time building your credit score up before making any applications. If you try to make an application with a low score, you may hinder it further as you will receive a decline marker against your report.
How is your credit score calculated?
Different credit reporting agencies store consumer information, in order to report and update their credit histories, for a range of lenders to access. Each company will operate in its own way, however, there are the same factors that are considered by each. These include the amount of outstanding debt you have, your repayment history, the length of your credit history (e.g. have you just come out of college and have no history of borrowing, or are you mature of age and have had several loans in the past), the types of credit you have/had and new credit. Each factor will represent a percentage that creates the total for your score. Your score can change over time depending on your activity. All of this information is used to determine your creditworthiness, and what risk you pose. The FICO is used across most industries, to quantify your score. This formula is always often reviewed to ensure it stays up-to-date with the market.
How to improve your credit score?
Fortunately, credit scores are constantly being updated to reflect new information. This means that you can work to change and improve your credit score at any point.
Review your credit report
Take some time to review your credit report and where your situation currently stands. This will help you to determine what activities and how much action you should take moving forward. You should then check your credit score on a regular basis to ensure you are taking the right steps and there are no errors against your name. It is important to only make soft inquiries when checking your credit score, to ensure you are not impacting it while you check. A hard inquiry is typically used when making an application, which is fine on occasion, but if it is used a lot in a short time frame, it can negatively impact your credit score.
Pay your bills in a timely manner
The first and most important thing you can do is to consistently pay all of your bills on time, for a period of at least 6 months. This includes payments on any credit card and loan payments, as well as phone bills and utility bills. Do what you need to do to help yourself continue to pay on time, for example, get yourself organized, set up direct debits or automated payments, etc.
Utilize credit options
It is a common misconception that your credit score will be better if you do not have debt. However, without borrowing money, you have no proof to show that you can be trusted to repay it on time. It is a good idea to take out credit, for example, in the form of a credit card and use it each month. However, it is vital that you repay it in full each month. It is common practice to purchase something simple, such as your food shop or petrol with a credit card, so you can easily and quickly pay it back.
Don’t close credit accounts
It has been reported that it can hinder your credit score if you close a credit account. If you don’t need the credit or have consolidated all of your debt, it is a better idea to keep the card in your name as it will keep your credit utilization rate at a good level. Your credit utilization ratio is the percentage of available credit that you have and are utilizing at any one time. This has been reported to be used by credit reporting agencies as a factor of your total credit score. Lowering your utilization ratio, for example, keeping the credit open but not using it, can help improve your credit score. You can find credit utilization calculators online if you are interested in seeing what your current score is.
Increase your credit line
If you have a good credit score, you may be approved for a higher credit line. If this is the case, it could help you improve your credit score. By applying for more credit, but not using it, will also help improve your credit utilization ratio and therefore, your overall credit score.
Consolidate your debt
It may be a good idea to consolidate your debt if you have it coming from several different sources. Consolidating debt means taking out one large sum of money, to pay off all of your existing debt, so that you are only left with one to keep on top of. This can come with many benefits, for example, only having one to focus on, and significantly reducing the interest rates that you have to pay. It is also deemed a much more efficient way to pay off your debt. If you are paying off your debt quicker due to ease and lower interest rates, the quicker you are going to improve your credit score. This is because it shows that you can pay off debt, as well as improve your credit utilization ratio. If you cannot get one big loan to consolidate your debt, you may consider a partial consolidation, or if you have credit card debt, you could transfer your balance to a 0% interest card.
There is no set time that it will take to improve your credit score. Instead, it will depend on your personal circumstances and the severity of steps that you take to improve them. If you have a long history of missed payments and multiple collections, then it may take longer than if you just have a poor utilization score. You must also remain consistent with these actions over time, to see the most impact.
Improving your credit score is a difficult balance, as you need to get credit to prove your ability to pay it off, but you also need to be careful with the number of hard inquiries that you make. It is likely that you may need to make an initial hard inquiry, such as a credit card application, which may hinder your credit score in the short term, but will positively impact your credit score in the long run, if you use it properly, pay it back in full and keep the utilization score low.
Whether you are thinking about buying a home, renting a property, buying a car, or nothing just yet, improving your credit score is a great thing to do for your future. You never know when having a good credit score may come in handy, especially as it has such a significant impact on your financial decisions.
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