Credit Score
Our Top Tips to Improve your Credit worthiness…
Credit score can have a significant influence over a person’s financials. It is directly linked to a person’s ability to successfully get loans and Credit, as well as the terms you are offered if your application is successful. The better a person’s Credit score is, the lower the interest they have to pay towards their loan repayments. Your Credit score can also be impacted by several factors such as a person’s repayment history, current debt, housing status, and even if you are on the electoral register.
Do not fall for misconceptions!
In the UK, there is no one Credit score that is market wide determined which judges your creditworthiness. The world of Credit is full with misunderstandings and misinformation often driven by lenders and Credit agencies to sell you Credit products based on fear. The opposite is true about credit scoring. The first and most important thing that a person needs to understand is that you can’t always get it right and there isn’t always a perfect solution. Different lenders are looking for different things. However, our top tips to improve your credit score should help you to look more attractive to most!
What is Personal Credit?
Personal Credit effectively refers to your reputation as a borrower, which helps lenders decide whether to approve you for credit and how much interest to charge you for it.
Another way to understand Credit is to look at it as a contractual agreement in which a borrower (Debtor) receives a sum of money or something else of value and commits to repaying the lender (Creditor) later, typically with interest.
What is a Credit Rating and Credit Score?
A Credit rating evaluates how likely a typical lender would be accepting to offer you Credit. Lenders, such as those providing loans, credit cards, and mortgages, use your credit history to predict your future financial behaviour.
Most often, when you apply for a Credit product, a Credit check is done on you. Practically what this means is lenders import all the data they have on you into an algorithm that assess the data using advanced functions in an attempt to predict your future behaviour based on your history.
For instance, imagine your friend Sofija is experiencing difficulties and asks to borrow money from you. Despite her being well-educated, respectful, and a close friend, you know she has a terrible history of being financially irresponsible. Considering you’ve lent her money several times before without her repaying you, you recognize the high risk involved in not seeing your money returned. In this scenario, would you still lend to Sofija despite her track record? Credit scoring focuses solely on your financial management skills, specifically how you handle your financial obligations and your history of repayment, rather than your personal qualities or social connections.
In the same sense, lenders look at lots of different data to work out your Credit worthiness when making an application. This may include what Credit products you’ve had and whether you’ve paid them all on time, how many applications you’ve recently made, and how much you owe. Some of this data comes from information they already hold about you, but often they’ll also consult Credit reference agencies such as TransUnion, Equifax, and Experian. These Credit reference agencies are known to collect and hold so much of this data about you. How they collect your data and what allows them to do so is another topic that will be discussed in more detail in our next article!!
Here are our top tips to improve your creditworthiness…
- Never miss or be late on payments – Payment history is a crucial factor in your credit score. Missing payments or paying late can significantly harm your score because it signals to lenders that you may be a risky borrower. Always ensure your bills and debts are paid on time to maintain a healthy credit score.
- While a poor credit history counts against you, so does having little credit history – If you have a thin credit file, lenders have less information to assess your creditworthiness. Start building your credit history by using credit responsibly, such as through a credit card or a small loan, and ensure you make payments on time.
- Providing consistent answers to all your applications – When you apply for credit, consistency in your application details (such as job title and phone number) helps avoid flags in fraud scoring systems. Lenders view consistency as a sign of stability and reliability, which can increase your likelihood of getting approved.
- Don’t let your partner/flatmates poor score wreck yours – Sharing financial products like joint bank accounts or mortgages links your credit histories. If your partner has poor credit, it can impact your own credit score. Be mindful of whose name appears on bills and joint accounts.
- If splitting up? Remember to cut your financial ties – If you separate from a partner with whom you have shared finances, ensure you sever these financial ties. You can do this by obtaining a notice of disassociation from credit reference agencies (CRAs), which tells lenders you no longer share finances.
- Getting on the electoral roll, to avoid tracing issues – Being on the electoral roll verifies your address and identity, which makes it easier for lenders to trace your credit history. This not only speeds up credit applications but can also slightly improve your credit score.
- Avoid many applications in a short time – Each credit application can result in a hard inquiry, which can lower your credit score. Multiple applications in a short period can make it seem like you are desperate for credit, which is a red flag to lenders.
- Time applications right, so fewer negatives on file – Negative marks such as County Court Judgments (CCJs), defaults, and bankruptcies stay on your credit report for six years. Applications for credit leave a mark for one year. Timing applications when fewer negatives are present on your report can improve your chances of approval.
- Avoid credit card cash withdrawals – Withdrawing cash with a credit card is costly due to high fees and interest rates. Lenders view this behaviour as evidence of poor financial management, which can negatively impact your credit score.
- Payday loans can kill mortgage applications. Repay BNPL on time – Payday loans are viewed negatively by mortgage lenders as they indicate financial distress. Similarly, Buy Now, Pay Later (BNPL) schemes should be managed carefully; although not traditionally reported to CRAs, missed payments can lead to debt collection and potential marks on your credit file.
- Paying rent on time – While paying rent on time may not directly boost your credit score, certain housing associations report rental payment behaviours to credit reference agencies. Late or missed payments could negatively impact your score. Additionally, landlords can initiate court proceedings for unpaid rent, which could appear on your credit report.
Why do you need to build your credit score?
A strong credit score enhances your ability to secure a mortgage or loan successfully. It also increases the likelihood of receiving lower interest rates on repayments and potentially higher credit limits on credit cards.
Conversely, a low credit score can diminish your chances of obtaining credit and negatively affect the rates and terms of any loans you do receive, presenting a financial challenge for the future.
For specialist advice and support. please get in touch with our divorce solicitors in London now by calling 020 7139 9266 or contacting the GOOD LAW INTERNATIONAL office.
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