Your credit score is a valuable asset – if you’ve ever considered getting a loan, credit card or anything requiring a credit contract you’ll know how important a factor it is to get the best deals, or even get credit at all.
Lenders use your credit score to determine how credit-worthy you are and make a decision on whether or not to lend to you.
Simply, the better your score, the more likely you are to get credit fast and get lower rates.
So what exactly is a credit score, how does it work and how can you improve yours?
What is a credit score?
A credit score is a three-digit number that is calculated by a mathematical algorithm based on a number of factors in your credit history and then assigned to you. Important factors that can influence your credit rating include:
- Your payment history – payments you have made (or haven’t made) in the past and late payments
- Your total debt – how much you already owe on other accounts and how much of your credit limits you are utilising (how close you are to your limits on credit cards, for example)
- Age of debt – how long your credit history is - when did you first acquire credit. A longer credit history is preferable to most lenders, indicating that you have been reliable in paying your debts and there is more data available for analysis, rather than recent debts giving no real means for data analysis
- Type of credit – do you have multiple loans or a credit card and phone contract? Lenders will use this data to determine the risk you present
- New credit – have you recently applied to lots of different lenders
The credit score was designed to help lenders manage risks – predicting how much of a risk you pose of not repaying the debt.
Whilst your score is important, how successful you will be with individual lenders is also dependent on their own criteria for lending. Lending decisions can not be influenced by age, race, gender, marital status, address and income, and these factors do not affect your credit score.
What makes my credit score so important?
Some lenders even look at your past credit score to see what type of borrower you have been in the past.
The better your score, the more likely you will be accepted for the credit you’re applying for, and likely to get a better rate as the lender trusts that you will repay the amount due.
Your credit score isn’t just important when applying for loans or credit cards – employers, landlords and utilities companies may also take your credit score into account.
How to improve your credit score
Now you know what your credit score is and the impact it has, here are some tips on how to improve yours...
- Never utilise more than 25-30% of your credit if you can help it. Credit utilisation is really important to lenders – if you look like you’re struggling financially and dependent on credit it will not look appealing to potential lenders
- Don’t max out your cards – this looks really bad to lenders and means you are likely to struggle to pay it all back
- Lenders will consider the overall picture of your credit history, looking at individual credit accounts and their utilisation as well as overall utilisation
- Make sure you are on the electoral roll at your address – this is used for verification and makes you look steady
- Check your credit report and negotiate the removal of any negative aspects which may be impacting your score. This is possible if you had a few slip ups in the past but not if it was anything more serious
- Keep hold of your oldest credit card even if you’re not using it – "old" accounts look good to lenders, making you look trustworthy. If you really want to close accounts, go for newer debts
- Don’t apply for too many credit accounts in a short period of time – this makes you look desperate and struggling
- Where possible, use eligibility checkers for credit cards, which involve a "soft search" of your credit report – leaving little or no trace
- Don’t withdraw cash from a credit card – this looks like poor money management and usually incurs higher fees
- To increase your level of available credit, thus reducing your utilisation, you could consider a pre-paid credit card, but don’t use it
These are great tips that do work and will improve your credit score. If your credit score is low at the moment then the change will not happen overnight – but keep applying these tips and with careful management it will improve.