Your credit score is often a key component in your ability to get credit or finance and this is one of the main reasons why looking after your credit is so important. When you mishandle credit or break the rules of your finance agreement, not only does your credit take a knock but it also limits the future lenders who would consider your application too. There are so many reasons why you may need to undergo a credit check in your life, whether it’s getting a mortgage for a home, applying for car finance online or even just getting a mobile phone contract, your credit score is key. Read below to find out why your credit is so important and the factors that may influence your ability to get finance.
What is a credit score?
A credit score is a numerical indication of how good you are at handling credit or finance. Your credit report can reveal your credit score, or you can perform a credit check on yourself for free to see where you fall on the scale. Credit lenders rank applications on a scale from bad to excellent and depending on which credit agency you use; your score may differ for each. However, a history of making late repayments, having high levels of debt, or not paying your finance back at all can usually leave you with a bad score.
Factors that can negatively affect your credit score:
- Missed or late payments.
- Having high levels of debt
- Maxing out credit cards or store cards
- A lack of previous credit history
- Using too much of your available credit
- Making multiple credit applications in a short space of time
What does good credit mean?
Usually, applicants who have a good or excellent credit score have a long history of borrowing money but being able to meet each and every payment on time and in full. By doing this, you are reducing the risk to future lenders as you are less likely to default on any loans based on your past behaviour. Your credit score also considers how much of your available credit you are currently using. To improve your credit score, you should try to only use 30% of your available credit. This means if you have a credit limit of £1000, you should only use around £300 or under at a time and then try to clear your balance on time. Making the minimum repayment each month on a credit card can indicate to lenders that you are struggling to pay off your debts and can also affect how much interest you are being charged.
Benefits of having a good credit score:
There are so many reasons why a good credit score is better for your financial life. Below we look at the top 5 reasons why good credit is so beneficial.
- Higher credit limits
Lenders may offer you a higher credit limit when you have a strong history of managing your finances. This is because they are more likely to get their money back on time and decreases the risk. Lenders can reward customers with better mortgage or car finance terms as they will want to lend to them.
- Easier acceptance rates
Finance or credit is always subject to status and it’s worth remembering that it’s never guaranteed. You will usually need to undergo a credit check, where lender check your credit score and credit report to see which type of borrower you are. It can be easier to get accepted when you have a strong history of managing your money effectively.
- Better interest rates
When you have bad credit, you are more of a risk to lend to as you will more than likely default on your loan or finance again. Lenders may offer these applicants finance but also set a higher interest rate as the level of risk is increased. Working on your credit score can help to lower your interest rate offered and save you money.
- More negotiation power.
A bad credit score can limit your options for credit, and you may only see a number of lenders offering you finance, or you may be declined all together. A better credit score means that you don’t have to go for the first lender that offers you finance and instead you can choose who you get finance from and also select the lender offering the best terms.
- Save money.
One of the biggest benefits of having a good credit score is that you’ll save money on any finance or loans you take out. Your interest rate determines how much you’ll pay back in interest overall and can even be include in your monthly payments. Having a lower interest rate means that you can get lower monthly payments and makes your finance or credit more affordable.