What Does A Good Credit Score Accomplish And How Can I Improve Mine?
Your credit score is like a visa on your passport. Your visa service company checks your eligibility across multiple criteria to give you a visa. You have to apply for a visa every time you travel, it is valid only for a limited time, and it can change every time you choose to check it.
Similarly, credit reference agencies check how likely you are to pay off your future debts. Your credit score can change the basis of your activities every time you check it. It enables you to access your credit now and in the future.
You now know what a credit score in theory is, but how exactly does a credit score affect your life?
When you have a high credit score, you automatically become eligible for higher credit limits and lower interest rates. All you have to do is keep your track record clean, with timely payments and smart credit limits. Logic says, there is less liability on creditors because your credit score validates you with your credit history.
Your Future Credit Line And Credit Limits
A good credit score opens avenues for premium credit cards and enables you to higher limits on your loans and mortgages. For example: If you are starting a business and want to take a loan for launching your business, there is a higher probability of a good credit line if you have a good credit score. The same can follow suit for home loans, car loans, and even personal loans.
Deposits, Fees, And Insurance
A good credit line often helps lower your security deposits for cars and house rentals. If you have a good credit score, your lender will know that you are trustworthy and won’t ask for that extra x% that a low credit score holder might have to deal with. Often, insurance companies and mobile phone operators check your credit score to evaluate if you pose a risk in terms of meeting your financial obligations.
More Negotiating Power
With higher credit score comes an opportunity to tip the scales in your favour! Negotiation is more about the tricks up your sleeve, but a strong credit profile surely gives you a chance to do that, from repayment terms for custom loans to insurance premiums.
You can also apply for the one loan that everyone has their eye on – the interest-free loan. Your lenders know they can trust you and you can use that in more ways than one.
How Do I Improve My Credit Score?
You now know the benefits of a good credit score. Now, before we deep dive into how you can improve your credit score, let’s paddle our feet a little to understand what are the components that put together your credit score.
Your credit score is based on five core factors:
- Payment history: 35% of your score is influenced by how regular you are with your payments. Keep in mind that late payments can stay on your record for up to seven years. Use payment reminders and auto credit features to always be on top of your due payments.
- Credit utilisation: 30% of your score is influenced by how much credit you currently avail. Credit utilisation checks how much you owe your lenders and should be in the range of 20% – 40%. For example, if you have a credit card with a credit limit of £10,000, your ideal average credit should be around £3000.
- Length of credit history: 15% of your score is influenced by how old your credit lines are. The older the history, the better. This component shows that you have long term borrowing capacity, and you are a responsible and credible borrower.
- Type of credit: 10% of your score is influenced by your credit mix. Your debt portfolio helps lenders understand if you are responsible enough to manage multiple types of debts and their repayments. This can include car loans, business loans, credit cards, etc.
- New Credit: 10% of your score is influenced by how many inquires have been raised for your credit score in a limited period. While soft checks do not affect your credit score all that much, hard checks are when a lender officially raises an inquiry to check your credit score. When you apply for multiple lines of credit at once, it can pose a red flag as there will be numerous hard checks in a stipulated period.
By knowing the factors that influence your credit score, you have an idea of what to keep in mind when working on improving your score. So, now the question is how to improve credit score uk?
- Do not miss out on your payments. If you delayed in making your repayments for a valid reason, you should immediately pay the amount and speak with your creditor. You can raise a ticket, mail, or call to request removal of the particular episode/delay from your history.
- Build your credit history with a credit card. Lots of people believe that if you have not had credit, you have a good credit history. From our list of the five core factors for a credit score, we now know that is not true. Think of it like this – can an employer hire you at a senior role if you have no work experience?
- Pay more than just your minimum dues. This reflects good behaviour for your prospective lenders and also exempts you from paying higher interests on the balance amounts. Always clear your monthly dues as much as possible.
- Close all your unused credit lines and contracts (like mobile). This helps clean up your credit history. To increase your credit lines, you should not hoard on credit, but use a staggered approach and strategically grow your credit limit.
- Plan your credit applications. Do not use a scattergun approach when applying for credit and apply everywhere. Do research, trust your credit score, and apply where you know you will get what you are looking for.
- Increase your credit limits. Progressively increase your credit limit by applying for different credit lines and keeping an individual credit utilisation of 30% on each card. Keep in account timelines and hard checks which could influence your credit score.
- Disassociate from any financial partner who has/had a bad credit score. If you are a guarantor or a co-signer for anyone who has a bad credit score, inform your creditors of the disassociation with an official mail trail. Keeping your record clean also requires you to collaborate with people who have clean records. This affects your authority and credibility with the lenders.
Your credit score has a massive impact on almost every financial aspect of your life, so knowing it is nearly as important as practising it. Actively make an effort to maintain and improve your credit and save over thousands of pounds throughout your lifetime.