How to Build your Credit Score & Why it’s Important
You may not need a credit card or a mortgage this year but you never know when your circumstances may change, so it’s important to build up a good credit score for when you need it.
Here, we debunk some of the mystery around credit scores and what you can do to boost your rating. Just a few simple changes could mean the difference between being accepted for a loan, credit card or mortgage. Here’s how…
What is a credit score?
Everyone has a credit score, or they should have. Your credit score is something lenders will use to help determine whether you qualify for a particular credit card, loan, mortgage or service. It shows them what kind of borrower you are, and how likely it is that you will manage your repayments.
Your credit score will help to determine whether you’re given the green light on a credit card or mortgage and what interest rate you will pay. If you have a higher score you are often seen as lower risk, which means lenders are more likely to give you credit.
Why is it important?
A higher credit score could help boost your chances of being approved for the best financial products at the best interest rates (e.g. mortgages, credit cards and loans). So it’s definitely worth keeping an eye on your report a few times a year.
What factors affect your credit score?
There are several consumer credit reporting agencies in the UK. The biggest of these are Experian, who will score you from 0-999, and Equifax who will score you between 0 and 700. It is intended to help potential lenders decide the level of risk involved in lending you money. Generally, higher credit scores show lenders that you are more likely to repay your loan. Here are a few things which will affect your score:
– How much of your available credit you’re using
– Your total debts
– Your history of credit account payments
– Public records e.g. electoral roll and county court judgements (CCJs)
How can you boost your credit score?
If you do have a low credit rating, never fear! There are a several things you can do to increase your score, these include:
– Proof-read your file: even if your address is slightly wrong, it can have an impact on your score. So, make sure you check all the details and amend any errors.
– You can apply for a credit card: Yep, that’s right, using credit on a regular basis, and responsibly, will boost your score. Keep your credit card active – you only need to spend small amounts but ensure you pay your bill off each month. This makes you appear more attractive to lenders and can help boost your score. It proves you can reliably pay back any money you borrow.
– High levels of debt: if possible, eliminate any outstanding debt before applying for new credit. Banks and credit card companies might be hesitant about lending you more if you already have a lot of outstanding debt.
– Pay your bills on time: paying your utilities or internet contract on time is a good way to prove to lenders that you’re capable of managing your finances.
– Check to see if you’re linked to another person: sometimes your spouse, friend or family member’s credit rating will be linked to yours through a joint account. This may impact your personal rating if they have a poor score.
– Monitor fraudulent activity: if something on your credit report is wrong, such as an application in your name you didn’t make, contact the credit reference agency immediately to update your file.
– Avoid too many credit applications: Every time you make a successful application for credit, a ‘hard search’ will leave a mark on your credit report. A large number of soft searches can also impact your credit score. Spacing out applications can help keep your score consistent.
There you have it. And remember, if don’t have an account in your name (for example if you’re in a house share), you won’t get the recognition of a healthy credit score, even if you’re contributing to the bills. Someone else will be taking the credit for you. Make sure you don’t get caught out!
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