Credit Scores

Credit Scores

It’s can be hard to wrap your head around the idea of a credit score. It’s a value that is attributed to you, that for most of the time, you don’t really need to pay attention to you. Yet there are times that you do need to be acurately aware of, not necessarily your credit score, but the impact that having a bad one can have. These times are not always obvious, and the last thing you want is to find yourself in a tight spot, or unable to do something, because of this seemingly imaginary number.

So this brings up a number of questions. What is a credit score? What are good and bad numbers to have? What can it affect? What decides my score? How can you make steps to change it? How can you maintain it? Let’s take a closer look.

What is a credit score?

The most important question, just what is a credit score? Your credit score is a 3 digit number that is designed to reflect how willing lenders are to give you money. The values range specifically from 300 – 850, with the lower end being bad and the higher end being good. It is a value system that was originally determined by FICO (Fair, Isaac and Company). Whilst you won’t usually have instant access to your personal score, there are a number of financial institutions out there that can keep track of this information.

What kinds of things affect your credit score?

There is a wide array of things that contribute towards determining your credit score, but these are some of the most common/important ones to remember:

  • The amount of credit you are currently using
  • The rate of your repayment
  • If you make repayments consistently
  • The value of lending that you have taken out in the past
  • The number of credit searches taken out against your name (ie, if a prospective employer is vetting you)
  • Any instances of failing to make repayments

How does your credit score affect you?

As mentioned before, your credit score is predominantly used by proespective lenders to see how much of a risk you are. More specifically though, this affects all kinds of lending in your name, and that’s more things than you might expect.

This can affect all manner of things from small loans or mobile phone contracts, to big decisions such as getting a car or a mortgage. Having a poor credit score diminishes the
number of lenders that are willing to give you a chance. This in turn gives you less choice as a consumer. The fewer the options, the more chance that you’re going to end up with a deal that you either don’t like or don’t want.

In extreme cases, you may end up having to declare bankruptcy or be put on an IVA (Involuntary Arrangement). These agreements stay on your credit report for six years and from an outside perspective, these are confirmation that you are poor / in debt and incentives not to lend to you. People who have been through either of these scenarios
will take you that in some cases, there are simply no options open to them depending on what they want to lend money for.

But there is life after poor credit. Let’s look at what you can do to turn things around.

How can I improve my credit score?

Probably the most common misconception about credit scores is when it comes to whether or not to lend. Often people presume that since all of the problems regarding credit scores are based around lending, is it better just not to lend?

NO! On the contrary, lenders want to see evidence that you are able to make repayments. If you’ve never participated in any kind of lending, you are an unknown quantity to a lender and this actually makes you more risky as a client. What else can you do?

– Be consisent – When it comes to lending, consistency is key. You want to be seen, not just to be making large repayment, but that you can do it regularly. In fact, lenders would prefer from a risk perspective to see you make a gradual repayment instead of in just one lump sum. This will rule of people with massively fluctuating incomes. From their perspective, you could be a gambler, have rich parents or other similar scenarios.

– Don’t pay back the minimum – Making consistent repayments is undoubtedly rule number 1, but even that is no good if you can’t be shown to pay back reasonable amounts. If you get a payday loan for £50 for instace, but you only pay back £5 a month, not only are you getting
a terrible return on your loan, but you will look like you’re not able to make repayments is anything unexpected should happen to you.

– Don’t max out on your credit allowance – Whilst responsible lending is a good thing, and making large repayments is positive, don’t push it to the limit. If you have a credit card with a value of £5000 and every month you are near that limit, it looks like you are on the edge of not being able to repay. As well are receiving very large bills in interest too, you may be perceived as a potential bankruptcy threat, as one large bill could push you over the edge.

– Be accessible – By this we mean, make sure you are on the electoral register, that you have a fixed address, phone number, email address, and that you update those that ought to know when any of these significant details change. Lenders won’t want to deal with you if they are finding it difficult to keep in touch with you.

How can I maintain my credit score?

Finally, you’ve gotten your score somewhere you’re comfortable with it being. But that’s only half the battle. How do you make sure you keep afoul of those that are now closely watching your financial habbits? Here are some basic tips:

1) Don’t get too caught up in good credit that you sign up for many repayment options at once and get tot he edge of your financial capabilities.

2) Use good practice tecniques. Taking advantage of clever options for repayment such as balance transfers for credit card repayments or consolidating debt from loans is going to show that you are well-informed and astute with your money.

3) Watch out for any potential fraud, and make sure you use sufficient methods to prevent it being an issue. If you work on a computer, for instance, but don’t make the investement for substantial anti-virus or malware software, it looks negligent. Lenders aren’t going to be as sympathetic as you might hope if you haven’t taken preventative measures.

4) Get in touch with an individual/company who can keep you updated on your credit score/let you know how to improve it. This shows that you are aware of your situation and looking to improve if necessary.

Many of us simply don’t run into issues when it comes to our credit scores. We’ve been dealing with lending in some form, like mobile phone contracts or overdrafts for some time, and as long as we can show our committment to repaying, it’s something we don’t need to think of.

But all of us experience financial troubles at one time or another. All it takes is for you to be hit with an unexpectedly large bill or need to make a payment for something important when you don’t have the money (doctor’s bill, children’s holidays, parking fine) and you’re in a bad position, and bad positions can snowball quickly.

Always see advice early when you find yourself in this position. Money troubles are the biggest source of stress and worry and there is almost always something you can do to make progress back to normality. Keeping a good credit score is a huge part of that. Don’t let yourself obsess of it, but keep it in the back of your mind. You don’t want to find that you can’t make the purchases in life that you want because of an unpaid phone bill from years ago. Try to keep on top of it, and seek help if you are finding it difficult.

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