Why do you need a good credit score?
Credit scores are an essential part of your financial health. You need a good credit score to access loans, credit cards or other forms of credit on the lowest possible interest rates.
Those with lower credit scores may be denied credit or could be offered unfavourable terms, usually involving a higher interest rate. It is vital to understand your current credit score before you apply for any credit.
This will help determine if you would meet a company’s criteria.
Many credit score companies can now offer pre-approved offers on loans, credit cards and finance based on your credit score to avoid complicated searches and possible refusals that would negatively impact your score.
What information do lenders use?
Lenders collate a variety of data around your lending history and lifestyle factors such as:
? Your current amount of debt
? The number of credit searches and applications you have made in the last 12 months ? Your current credit obligations (e.g., contract phones, loans, credit card balances, car loans)
? Whether you pay balances in full or miss any payments
? Debt-to-income ratio?– how much do you owe versus your income, so you are not overstretching yourself
? Employment history
? Whether you own your home and how long you have lived there
? Public records (electoral roll and county court judgments).
?Essentially, lenders are making an assessment on your ability to pay back the debt.
They are more likely to lend to people who pay their bills on time, have a trackable employment and housing history and are registered on the electoral roll.
How do you check your credit score?
A credit score is a three-digit number calculated by applying a mathematical algorithm developed by Experian, TransUnion and Equifax, taken from the information in your credit reports. These are updated every time any of the above criteria changes.
The way you manage your monthly payments (this includes monthly household bills like utilities as well as any other credit agreements) is reflected in your rating.
You have the right to access your credit score without having to pay or subscribe to a service.
Anybody can gain free access through the following websites:
However, if you need further details behind these scores you will need to pay.
For example, you might want to know the specific issues negatively impacting your score.
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By paying for a premium account with a credit reference agency you will be able to see a comprehensive credit report.
How you can improve your credit score
If your score is lower than you would like, don’t worry!
You can do several things to improve it.
Here are some top tips for helping you get a star credit rating:
1. Use other forms of credit.
This may sound strange but think about it. A credit agency must have some history to predict your future behaviour. If you don’t have other loans or credit cards, they have little information to go on. So, use credit within sensible limits.
2. Make your monthly payments on time.
Make it a priority to pay all your monthly bills and credit payments on time. Late and missed payments have a detrimental effect on your credit score. Create a monthly budget so you know exactly what you have to pay before calculating your disposable income for everything else. The more disciplined you are, the better your score will be.
3. Make sure your personal details are correct.
Ensure your address is correct and that you are listed on the electoral roll. Errors in address or not appearing on the roll make a significant impact on your score. If you do spot any errors, inform the credit agency immediately so your record can be corrected.
4. Use credit but not too much.
We advised above to use other forms of credit.
What is equally important is that you do not use too much. Credit agencies review how much of your total available credit you use at any time.
So, if you have a credit limit of ￡4,000 on your credit card and your current balance is ￡3,000, you are at 75 per cent utilisation. If your credit cards are maxed out, you have additional loans and a high mortgage, your credit score will be lower than for someone who is using credit sensibly. To increase your credit score, reduce your credit utilisation to below 50 per cent. The best scores are generally applied to people using no more than 30 per cent.
5. Share your bank account with your credit agency.
If you link your bank account with a credit agency, they will be able to get much clearer insights into your monthly transactions and levels of income. This helps lenders make more accurate decisions about how much you can afford to borrow at the best rates they can offer. You must provide your consent to your bank to set up this link.
6. Get a credit-building credit card.
If you have had some financial difficulties in recent years and want to increase your credit score, a credit[1]building card can be an effective tool to help you along the way. You are more likely to be approved for these cards but must accept that you will pay much higher rates of interest than standard cards. The key to using a credit-building card is to pay off your monthly balance in full every month. If you can do this, you can accelerate the rebuilding of your credit score without facing high interest payments.
Monitoring your credit score
Monitoring your credit rating will also help you keep control of your financial situation. A bad credit rating is likely to be the barrier between you and a mortgage, loans or even car finance. Doing so also allows you to identify any potentially fraudulent credit applications on your file. If you do find one, contact the credit agency immediately and report it.
Monitoring your score allows you to be more conscious of what you are spending and the key areas you need to prioritise to help you improve your score.
If you spot any activity on your credit report that you do not recognise, report this immediately as you could have been exposed to identity fraud.