Building Strong Credit
Building Strong Credit

Credit in Control- How Building Strong Credit Opens Financial Pathways

25th January 2024

Your credit score isn't just a number; it is a reflection of some of your financial habits. It plays an important role in determining your credit limit and interest rate. Whether it’s buying your first home, getting a new car, or landing that dream job, your credit score can certainly have an impact.

So let’s explore how to get a good credit score and why it matters.

What is a credit score?

A credit score is a three-digit number that gives an indication of how creditworthy you are. It is used by lenders as part of their determination of whether you are a reliable candidate for a loan and what interest rate they are prepared to offer. A credit score usually ranges from 300-999. The higher the score, the better it is.

For example, if you want to take out a car loan, the lender is likely to obtain your credit score to assess the risk involved. If your score is good, it shows you are have repaid credit, on time, in the past, and the lender might be more inclined to approve your loan. However, if you have a low credit score, you can be perceived as a higher risk. This may reduce your chances of loan approval.

Please note, that if one loan provider refuses your loan, it might not mean that others will as well. Different lenders have different methods of evaluating your application and will also have different credit policies.

Your credit score is likely to be part of the assessment used by credit card providers when setting limits and interest rates, etc. So, with a higher score, you can often access a greater credit limit and lower interest rate.

The credit score is calculated by Credit Reference Agencies. There are 3 main CRAs in the UK:

  • Equifax
  • Experian
  • TransUnion

What factors affect your credit score?

Rocket Money, shows that a credit score is affected by several factors, like:

  1. Whether you have paid your bills on time
  2. Amount of debt/amount owed: The amount of money you've borrowed and how much of your available credit you're using impacts your credit score. Here’s how you can calculate your credit utilization.
  3. Your duration of credit history – An old account demonstrates strong and established history; this might help you achieve a better score
  4. Different types of credit that you have used - if you use several different types of credit, it shows your ability to handle different types of funding and might be beneficial for your score.

Also, please keep in mind that loan applications can lead to a hard credit check which can also have an impact on your credit score.

How do the lenders gather the information about your credit history?

Any time you apply for a loan, lenders may use a combination of the following sources to evaluate and decide whether to lend to you:

  • Information from your credit report
  • Details from your credit application form
  • Data the lenders already have on you (for instance, if you've been their customer before)
  • Information you provide, for examples details about your income and expenditure.

Apart from the lenders, CRAs also allow people to obtain details of their own credit score. By getting these scores, you might get an idea of how lenders view your credit history.

What is a good credit score?

There is no one number that is universally a good credit score. Every CRA has its own method of calculating your score. This means the judgement criteria and top score criteria change.

For example, Experian uses a rating scale of 0-999. This might make a score in the range of 881-960 “good”, “721 – 880” is considered to be fair and “561 – 720” to be “poor”.

On the other hand, Equifax uses a range of 0-700. In most cases, the Equifax score lying between 420-465 is considered as “good”, and anything higher as “excellent”.

Why does a good credit score matter?

A good credit score does not just mean that you will be able to access more favorable interest rates. It also opens a lot of doors for you. Here are some ways a good credit score can matter:

Savings on interest

In most cases, the higher your score, the lower the interest rate you have to pay. If the lender is assured of your creditworthiness as a borrower, they might be more inclined to offer lower interest rates. Even the smallest differences can add up over time.

For example, if you buy a £150,000 flat on a 25-year mortgage with a 10% down payment at a 5% interest rate, you end up paying more than £236,758 over the loan's tenure. But, if you manage to get a 1% lower interest rate of 4%, you only pay £213,773. This will give you a total saving of £22,985 by the end.

Better chances of approval of credit products

A higher score usually makes the process of approval much easier. It allows you to access a variety of different credit products as well as credit providers. Having a range of options can make the whole process less expensive for you.

Higher credit limits

A good credit score can improve your chances of getting a higher credit limit. This is potentially a game-changer for achieving your financial goals like buying a new car or upgrading your home.

Securing better car insurance rates

Data indicates that drivers with poor credit scores have higher claim rates. This can make insurers perceive them to be a greater risk and they might charge a higher premium.

The exact variations will differ from one provider to the other. But in general, better credit scores mean lower premiums, and vice versa.

How to get a good credit score

Improving your credit score might have many perks like accessing better deals at more favorable rates. You can take the following steps to improve your score:

1. Residence confirmation

Register on the electoral roll at your current address, even if you are living in shared accommodation or with your parents.

2. Build credit history

Having a lengthy credit history allows companies to evaluate your credit score and shows your ability to effectively manage multiple credit accounts over an extended period. This is especially important for young individuals or newcomers to the country, who may have little to no credit history. A lack of credit history could result in a lower credit score.

3. Make timely payments

Make sure to pay all your accounts on time and in full every month to show reliability to lenders. Old and well-managed accounts usually improve your score.

4. Low credit utilisation

Try and keep your credit utilisation below 30% for a positive impact on your credit score.

5. Check for errors

- Regularly check your credit report for inaccuracies, as these details can be enough for a lender to refuse a loan.

- Report any mistakes promptly to maintain an accurate credit profile.

- If there are some negative facts about you on the file that are correct, but you think it would be helpful to explain the circumstances behind the information, you can ask for a Notice of Correction. These could include situations such as a period in hospital or when you lose a job.

6. Monitor for fraudulent activity

You must be vigilant about identity fraud and monitor your credit file. If your information goes into the wrong hands, they can use it to obtain money in your name. It is best to reach out to the CRA’s fraud support team if you have any suspicions.

7. Stability in living situation

Avoid frequent changes in residence. If you move around a lot, for example, it can seem as though you have trouble paying rent.

8. Consider getting a credit builder card

These are credit cards that help you build a credit history when you are just starting, or when you want to rebuild your credit score. These can be especially useful if you either have a low credit score, or if your income is not strong enough to get a credit card you want or if you haven’t had the time to build a credit score for the lender to judge you on.

Should you get a personal loan to build your credit?

A personal loan may be an option when you want to build your credit score. You could have a chequered credit record, for instance, or a limited history as a borrower.

However, please note that it comes with a risk.

If you are not able to manage your loan payments, you might end up affecting your credit score negatively. This can be a cause of concern for future lenders when you apply for credit again. But, if you are confident about paying back the loan, it can be a option to build your credit score.

Please note that personal loan applications can result in a hard search. The search stays on your file, and other lenders will also be able to see it. This means that if you apply and are rejected several times, it can affect your credit score negatively.

Can debt consolidation help you improve your credit score?

Debt consolidation can make the process of tracking and managing your debt payments easier. This, in turn, might help you improve your credit score.

Of course, this is based on the assumption that you will be able to manage the repayments without adding more debt overall.

How it affects your score:

  • Debt consolidation requires a hard credit check. This could temporarily affect your credit score.
  • Consolidating debt can impact your credit utilisation, which is the proportion of available credit that you have used. This also affects your credit score as it shows how well you manage your finances.
  • You might close unused accounts, like credit cards. This can reduce your overall credit limit and make it seem like you're using more of your available credit. It can potentially affect your credit score.

However, if you make timely repayments, any impact on your score should be temporary.

To sum up…

Your credit score is a powerful tool that can shape your financial journey. If you want to enquire about a loan, Oakbrook Loans might have some options for you. However, when taking a loan be mindful that a missed payment or a delayed payment may reflect poorly on your score.

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