Lenders use credit scores to check your ability to handle debt and find out if you are a financial risk or not. Your credit score is a three-digit number that shows your creditworthiness. Your chances of securing loans depend on your credit score. There are three Credit Referencing Agencies (CRA) in the UK namely Experian, Equifax and TransUnion. Each CRA has a different credit score range, which means a good credit score is different for each CRA. Here’s what a good credit score looks like for each CRA:
- A good Experian score lies around 700, and 800 is considered ideal. You will have to monitor your credit report to ensure your credit score is solid.
- For Equifax, 660 is a good credit score.
- A good credit score according to TransUnion is from 661 to 720.
If you have a good credit score, your chances of saving money, avoiding hefty interest rates, and getting more reasonable deals on loans go up.
However, if you have a bad credit score, you will most likely get loans at high-interest rates, if you qualify.
What do you mean by a Credit Check?
When you apply for a loan, the lender will determine your creditworthiness, based on which you will receive (or not) receive the loan.
This is the lender’s way to find out if you can manage your debts, or if you are likely to default on your loans.
You can expect the lender to look at your official credit report that contains your entire financial history. The lender gets this from one or more of the primary CRAs at a fee.
Banks and other lending institutions use this report to find out if you have debt, mortgages and so on. If this is the case, these will reflect on your credit score. In a nutshell, the better your score, the better your chances of being approved for the most appealing loan deals.
What factors affect your Credit Score?
There are a bunch of factors that affect your credit score. Here are a few:
Late payments
If you make untimely loan payments or miss them, your credit score will take a beating.
Minimum payments
You can expect your record to get tainted if you are making only minimum payments every month because it indicates that you are struggling to pay off your debt. Making bigger payments will help you increase your credit score.
IVA or Bankruptcy proceedings
You can expect to have a low credit score if you are declared bankrupt or become a part of an Individual Voluntary Arrangement (IVA).
Very little or no financial history
Applying for loans and securing them will be extra challenging if you do not have a credit history. If you’ve never borrowed money before, it is impossible to determine your creditworthiness.
Frequency of applications for credit
Here’s another thing that can affect your credit score. If you keep applying for credit at different banks and financial organizations, you will damage your credit score. Instead, perform a soft search. However, note that this information will not stay on your record permanently. A missed payment, for example, will stay on your record for three years. A bankruptcy generally remains on your report for six years.
How do you improve your credit score?
Check this website if you want to find out how to build credit , keep in mind that there exists no standardized system for credit scoring. Here are a few ways to increase your credit score.
Register yourself on the Electoral Roll
Here’s a sure-fire way to improve your credit score. Get on the electoral roll. Be sure to register yourself to show that the information you submit to your lenders is legitimate.
Get rid of old accounts
If you aren’t using some accounts, you are better off closing them. Even if you do not have any debt, the lender will look at your entire financial history to determine your creditworthiness. Having old accounts will not work in your favour.
Consider using a Credit Builder Card
You need to prove that you can manage your debts well and improve your score using credit builder loans. If you have a low credit score, the interest rates for credit that you apply for are generally high. Consider using this option if you are confident about managing your payments.
Show that you can make payments on time
As you may know, the best way to boost your credit score is by repaying your debt on time. Making timely loan repayments, preferably well before the deadline will help you improve your credit score, and eventually fetch you better loan options.
Check your Credit Report regularly
Here’s something people do not do often. It is easy to make purchases and forget to track your expenses. However, this will prove to be detrimental. Make sure you track each transaction and check your credit report regularly to ensure your expenses add up and that you haven’t been wrongly charged. If you fail to do this, your credit score will take a hit.
Conclusion
There you have it – if you are new to credit scores and want the gist, this article should have you covered as you strive to build your credit score from scratch. Ultimately, you need to open a credit history if you’ve never borrowed money before and make timely loan repayments to stay on top of your finances.