A credit score is a numerical asset which indicates how good you are at managing your money and repaying debt. Before you apply for any sort of credit or finance, lenders may want to know what your credit score is and seeing you have a low credit score can put them off or they may even decline your application. The guide below explores how a low credit score can affect your financial life and how to fix it.
How does a bad credit score affect you financially?
There are a number of ways in which a low credit score could be holding you back. The ideal credit score may look different to each lender but your credit score will usually be considered when applying for the following forms of credit.
- Mortgages. A credit check is crucial for a mortgage to help the lender decide if you can be trusted to keep on top of your repayments.
- Car loans. A bad credit car loan can be much harder to obtain if you have a long history of not being able to keep up your repayments.
- Credit cards. Credit card companies will usually perform a credit check to see if you can take on any more debt and if you will pay it back on time and in full.
- Mobile phone contract. A mobile phone contract can be a form of debt as you borrow an amount and then pay the lender back monthly so they will be interested to know how you’ve handled credit in the past.
How do you better a low credit score?
We’d advise you to be wary of any companies offering to help you improve your credit score fast or quickly. Rebuilding a low credit score takes time and effort and is all about showing future lenders you can be trusted to handle your finances through the work you put in now.
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Check your credit file.
Before you do anything else you should check your credit file to see what information is listed on there. You should get into the habit of regularly keeping track of your credit score as it gives you an insight into the factors which affect it. Inaccurate information on your file can negatively impact your credit score so if something needs updating, you can contact the credit reference agency who provided your credit file to get it corrected.
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Make any payments on time and in full.
One of the easiest ways to help improve your credit score is to keep on top of any outgoing payments and make sure you have enough money to pay them on time. Direct debits are a simple way to make sure your debt is collected each month on time. If you’re struggling to afford to pay any of your current contracts, you must speak with the lender to see how they can help and never simply miss a payment. A missed or late payment can stay on your credit report for up to six years! =
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Use credit little and often.
It’s still a common misconception that using credit is a bad thing but having a good mix of credit is actually a good thing. You should only use small amounts of credit at once and try to stay below 30% of any available limit. For example, if your credit card have a max limit of £1000, you should only use around £300 of the limit at once and make sure you make more than the minimum payment each month.
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Reduce how much debt you owe.
Your credit score is calculated by how much current debt you have. Before you take on any more credit, you should first try to reduce some of what you owe. Having high levels of debt can have a negative impact on your credit score and make it harder for you to afford any new credit.
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Limit your applications for finance.
When you apply for finance, a credit check will be performed on your credit file. A hard search credit check can have a negative impact on your credit score if there are multiple hard searches at once. You should try to limit your applications for finance or use an eligibility checkers to see if you’re likely to be approved first without harming your credit score.
