When it comes to finance matters, there's a lot of talk surrounding credit scores and credit history. It's crucial that your credit score is reasonable, because it's so important in almost every financial aspect. If you want to borrow money, rent a house, or get a credit card, you will be judged based on your rating. And we all want to make sure that we make a good impression.
But how do you know what a "good" credit score looks like? And if your score isn't good, is there any chance for redemption? The good news is that yes, there is, and you can improve your score in order to ensure that you have a better chance at getting great deals. Keep reading to find out everything you need to know about credit ratings, what they are, how they work, how you end up with good or bad credit and more importantly, how you can take steps to improve your current rating.
What Is Credit Score?
Let's start by defining the concept of credit score and figuring out why it's so important. Your credit score or rating is a number on a scale reflecting your financial responsibility. This number goes up or down as a direct result of your financial behavior and it's taken into account by banks, lenders, landlords, etc. for most things involving loans, purchases, or any major financial transactions. This number indicates whether you've made good or bad financial decisions in the past, and how likely you are to continue to make them in the future. A bad score makes you a risk for a lender, and that attracts consequences.
Why Does It Matter?
Good credit allows you to get the best deals available, because you represent a safe borrower or financially responsible citizen. So, if you were to get a loan, for example, the bank is more likely to not only offer you the loan, but also give it to you at a lower interest rate, offer you more money, and allow you to pay over a longer period of time. This is because, based on your previous financial track record, you can be trusted to pay it back responsibly.
Bad credit, on the other hand, attracts distrust. If you have a poor credit score, it means you haven't been responsible, and are not likely to pay money back on time. That means you can get rejected, outright, in the worst case scenario, which makes it difficult to find financing, a home to rent, etc. Otherwise, you may have access to lower borrowing amounts, higher interest rates, and shorter repayment terms. You might even need a co-signer or collateral to secure your loan. This is because the lender needs more to ensure they can get their money back if you default.
What Is Good Credit? What About Bad Credit?
What constitutes good credit and bad credit is debatable, because not everyone works within the same scale. Experian, one of the most well-known credit check providers, operates on a scale from 0 to 999, with 0 to 720 being Poor credit and 881 to 999 being Good to Excellent. Equifax, on the other hand, is another major company, who uses scores from 334 to 818. So, the same number does not necessarily mean the same score bracket for every company.
How Do You Improve Your Credit Rating?
Now you know that it's very important for you to have good credit, and you also know that even the worst credit score in the world can be improved. The question is how? Let's take a look at some of the Dos and Don'ts - how to improve your credit rating:
- DO pay your bills on time
The first, and easiest rule of all is to always pay your bills on time. It's true that sometimes, things happen and you cannot readily afford to pay every single bill you have coming in the same month. Or maybe you didn't get paid on time, or you had a financial emergency, or you had extenuating circumstances. However, think about all the times when you were late simply because you couldn't be borrowed to pay on time, or you didn't want to, or you forgot. Make a point to pay on time every single time to establish a history of responsible financial behavior.
- DO set up direct debits
If you struggle to remember when payments are due, then you can mark them in your calendar, set an alarm on your phone to remind you, or better yet - why don't you set up a direct debit at the bank? If you have recurring payments to make, such as rent, council tax, the electric bill, etc. the easiest thing to do is set up a direct payment. All you need to do is make sure there is enough money in your account. Then, the payment is made automatically every month, thus ensuring that you never forget or are otherwise prevented from making the payment.
- DO pay off previous debt
You can't very well demonstrate good financial standing and behavior when you've got old debt, now can you? That's why, before moving on to anything else, you've got to take care of your debt problem. You can successfully pay off debt by getting a debt consolidation loan, trying to write off debt, making a budget, working with the lender to set up a different payment plan, etc. The important part is to make active efforts to repay the money and you will be able to find a solution that allows you to live debt-free and benefit from the boost in your credit score.
- DO perform soft searches
If you do find yourself in need of a loan, it's important to remember that you can't just start applying haphazardly left and right, because that is going to hurt you. The more you get rejected, the more it will impact your credit score. Instead, make sure to check whether or not you meet the eligibility criteria, and if you're still not sure, then perform a soft search before applying. That will enable you to check whether or not you are likely to be accepted for a line of credit without impacting your score.
- DO use loans to improve your score
Debt only has a negative effect if it goes unchecked and you can't afford to pay it back, or you've skipped payments. But if you act in a controlled manner, a loan can actually be an excellent way to boost your credit. You see, when you get a loan and then make all the repayment instalments on time, without issues, or repay the loan early, that impacts your score positively, as it demonstrates financial responsibility and affordability. So, you can definitely use it as a technique to improve your score, by getting short-term payday loans.
- DON'T be late with your payments
On the flipside, late payments are decidedly negative, because they create a pattern of irresponsibility. When you pay late time and time again, it means you cannot be trusted to remember or be able to afford to pay your bills or your debt in a timely or responsible manner. It will negatively impact your credit score and create an unsavoury history.
- DON'T apply to loans indiscriminately
A lot of borrowers who don't know better make the mistake of applying to lots of loans when they have bad credit. If you don't know for sure if you're going to be approved, better safe than sorry, right? Wrong! As you will have found out, applying to more loans doesn't mean you have more chances of being approved. In fact, you get the opposite effect and damage your credit score, making it less likely that you will get approved for a line of credit. Take some time to think and check things before applying, and never apply to loans you don't meet the criteria for; that application doesn't come cheap.
- DON'T default on your loans
When you've got debt and the loan instalments are all due at once and you're falling behind, it can be very overwhelming. If you can't catch up, it can be very tempting to just give up on trying to pay, because it seems rather pointless. And that is exactly the mistake people make. But that means it damages your credit, making it difficult, or even impossible, for you to be approved for other loans in the future. Instead of defaulting, try to work with the lender. They are interested in getting their money back, so they will be willing to work out a compromise or payment plan.
- DON'T allow bills to go to collections
Have you ever been in a house share situation where you can't reach an agreement regarding bills? Or you've had a dispute with a service provider and you decided that you're going to refuse to pay, because you feel the charge is unfair? It may very well be, but that unpaid bill is still going to end up at a collections agency, and that is a death sentence for your credit rating. Whatever you do, don't allow bills to go to collections.
- DON'T get loans you can't afford
This should go without saying, but if you are looking at loans and it doesn't seem like you can reasonably afford to repay the monthly instalment, do not get the loan. Any reputable lender should perform an affordability check anyway, but it is ultimately your responsibility to make sure that you can repay the loan. If you bite off more than you can chew, there is a chance you will be forced to default in the future, attracting issues and impacting your credit rating severely.
All in all, your credit score is a very important part of your financial identity and it comes into play in most situations where you need to borrow money, get a credit card, rent a home, etc. And since it's so essential, you want to make sure that your credit is as good as possible. Follow these steps to improve your score!