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Credit scores fall into a murky territory of financial detail that is often poorly understood. Most people don’t have an idea about credit scores until it is time to use a credit product – but it may well turn out that they don’t qualify for a good one. But what is a credit score?
Simply put, the credit score is a numerical representation of your worthiness of receiving a credit product, as perceived by individual lenders. Different companies have different ways of calculating it, including different criteria that all add up to the sum total of your overall credit score. The final number is the indicator the lender would use to judge whether you’re a good applicant or not.
Why a Good Credit Score Matters
Making sure your credit score is as high as possible is a worthwhile endeavor, even if you don’t need access to a credit product right now. You are very likely to need to take on credit in the future – and if you haven’t started already, you’d better think about improving your score sooner rather than later. It’s an arduous undertaking and one that will probably require the counsel and assistance of a professional like the London insolvency practitioners HudsonWeir to sort out properly.
A credit score is based on many different factors, some of which may vary from lender to lender, but the basis for it is always your previous credit history. Lenders use this credit history to discern whether you’re a good client or not. Due to this, having no credit history may be as detrimental to an applicant as having a bad one. This may seem like a vicious cycle – you have no credit history, and in order to get one, you need to have one already.
How to Get Into The System
However, there are ways to get into the system and improve your prospects. For instance, you can get a credit rebuild card. The conditions on one of those are likely to be atrocious – with annual percentage rates reaching well above 30%, in some cases. You don’t actually need to use the card as a credit card per se. If you only use it for non-cash transactions and repay your debt in full each month by direct debit, you won’t have to concern yourself with that abominable interest rate. If you do this, you will demonstrate to potential creditors that you are a trustworthy applicant.
How to Demonstrate Your Trustworthiness
Always pay on time. This can’t be overstated – never be late or default on a payment, as doing so will be absolutely devastating to your credit score.
Due to a peculiarity in UK law, insurances are almost universally paid annually, up-front. Many customers prefer to portion these expenses into monthly fees, though – which is why insurance companies effectively offer to loan the sum of money to their clients and then spread payments throughout the whole year. The interest rates on such deals are appalling – however, they still count as credit and boost your credit score.
Another common expense that can improve your credit score if handled properly is your rental payments. A 2016 program by Experian and The Big Issue Group records your rental payments in order to boost your credit score with all lenders.
Make sure that you’re not financially linked to someone with a bad credit score. Any other person’s bad credit history can affect your own if you have a joint financial product. Don’t let that happen, or work to remedy the situation if this is already the case.
Never withdraw cash from your credit card. Doing so is usually financially disadvantageous and may indicate a lack of sound financial management to some lenders.
Don’t apply for credit products too often. All lenders keep a record of your credit applications for one year, and seeing that you have a lot of those indicates to them that you are desperate – which they see as a bad sign. What you should do if you are interested in seeing which lender can give you the best conditions is to ask for a ‘quotation search’ or ‘soft search’, if available. These are safe, as they don’t leave a footprint on your credit score, while still informing you of the lender’s conditions if you choose to apply for credit.
Register to vote. This has an impact on your credit score and can be done at any on Gov.uk. If you’re not eligible to vote, this isn’t a problem – you may still get access to credit products in the UK if you provide the lender with proof of residency – a UK driving license or utility bills to your name should be good enough.