There’s a hidden number attached to your back as you browse loans, mortgages, and other financial products. It’s called your credit score and it’s what is used by lenders to determine how much of a risk you are, as well as how much you can borrow and what interest charges will be applied.
But what exactly is your credit score, how is it formed, and how does one go about improving it?
What is your credit score?
A credit score (or credit profile) is created for each individual based on a credit report, which is primarily used by lenders to determine whether (or how much) they can lend to you. Confusingly for most people, this score can vary between different consumer credit companies.
When applying for a financial product, your credit score can be used by a lender to see whether money can be lent, how much you’d be able to borrow, and how much interest would be charged. In essence, the higher your credit score across the board, the higher chance you’ll get a better deal.
While it’s important to try and keep a clean history with your finances, lenders will usually be most interested in your current situation. While any recent issues would be of most concern, it’s important to note that lenders can (and usually do) look back a few years to see if you’ve made any substantial financial decisions.
If you’ve missed a payment or are sometimes late in paying for something, lenders may charge you higher interest, limit the amount you can borrow, or simply cancel your application. It’s all about how much of a risk a lender believes you to be and your credit score (and profile) will provide all the necessary information.
There are numerous credit profile companies that can provide you with a credit report. These include:
You will largely be able to view a credit report for free, though most of these companies do offer premium subscriptions that allow you to view more in-depth details about your profile. Companies like ClearScore, Experian, and CheckMyFile all offer free trials so you can see if it’s worth paying for.
What affects your profile
There are a few factors that can affect your credit score by determining just how much of a risk you could be to lenders. These vary from minor points to major concerns.
Making payments on-time plays a big role in your credit profile. This shows potential lenders you’re trustworthy. Missing payments, paying the minimum on your credit card late, or having a payment bounce is a sure way of having a mark on your profile.
Lenders don’t want to see you utilizing a fair chunk of your available credit. Should your credit cards add up to a total of £10,000 and you’re regularly using upwards of £8,000, this shows that you’re not earning enough to bring down that amount on top of your expenditures.
Using a credit card is great, so long as you regularly pay off the amount in full.
Age of credit
If you’ve owned a credit card for more than five years, this will be viewed as a good sign to lenders. Even more so if you pay everything off on-time.
As well as showing that you’re able to effectively manage a credit card, lenders will also look at the type of credit you have on your profile. A car loan is different from a credit card, much like a phone bill is different from a mortgage. Having a healthy, diverse credit profile is important.
Finally, hard searches are marked on your credit profile. These are when you apply for a line of credit, a loan, mortgage, or some other financial product.
How to improve your score
There are various ways to improve your score. Most of them match up to what’s actually affecting your profile, but it’s worth reiterating to drive home how to keep your finances in order.
Make payments on-time
Be sure to make all your financial commitments on-time, be it a credit card, phone bill, or car finance plan. Budget accordingly and contact the lender if you’re struggling to see if there’s a way to reschedule when payments are taken out or create some form of payment plan.
Lower your credit usage
This one is simple: lower the amount of credit you’re using. If you have a few credit cards, be sure to only use one and don’t exceed 25% of your total credit. I’m always conscious about credit use and would try to avoid crossing that dreaded 50% utilization mark.
Take out a credit card
If you’ve never had a credit card before, don’t be frightened by them. They’re actually very useful for building up your credit report and show potential lenders that you’re able to keep up with payments. Simply use the credit card as you would your debit card.
It’s also good as an extra form of protection to combat fraud since you’re not spending your own money. If you notice a potentially fraudulent purchase, you can contact your credit card supplier and open a line of inquiry, but at least the amount of money hasn’t been deducted from your bank account.
Don’t apply for countless products
Every time you or another company checks your credit profile, what’s known as a soft search is performed. Should you decide to go through with a financial product application, a hard search will be carried out to check through and view everything on your credit profile.
Soft searches are not visible to companies, but hard searches are. The more hard searches you have on your profile, the more potential red flags could be raised. So, limit the number of applications you put through for utilities, phone contracts, loans, and more.
Invest in the stock market
When you’ve improved your credit score and have cleared all owed debts, it’s time to make your money work for you with the stock market. Allow me to run you through the wonderful world of investing and the power of dividends.