A credit score is a number that lenders use to assess your ‘credit worthiness’. The number is based on your credit history, which includes information about your past borrowing and repayment habits, how long you have resided at your address, and if you are on the electoral roll. The higher your credit score, the more likely you are to be approved for loans and lower interest rates.
Credit scores are categorised from ‘poor to excellent’ with the scoring range typically as follows:
Why are credit scores important?
Credit scores can have a significant impact on your finances and way of life. A poor credit score can hinder your chances of being approved for a loan, increase the interest rates you’ll be charged on those loans, and impact your ability to buy a home.
Benefits of having a good credit score
- Lower interest rates. Lenders are more likely to offer lower interest rates to applicants with good credit scores. This can save you a lot of money over the life of a loan.
- Better loan terms. Lenders may also be more willing to offer better loan terms, such as longer repayment periods or lower down payments.
- Borrowers have more access to credit, such as different types of loans and credit cards.
The effects of having a poor credit score
- You are rejected for any type of credit such as loans and credit cards.
- Higher interest rates. Lenders are more likely to charge higher interest rates. This can make it more expensive to borrow money.
- Fewer credit options.
- Difficulty being approved for a mortgage.
How to improve your credit score
Improving your credit score takes time and effort, however the long-term benefits are worth it.
- Make your repayments on time. Even one missed payment can have a negative effect on your credit file. Multiple missed payments could potentially lead to a default on your credit file. Defaults last for six years.
- Keep your credit utilisation low. Utilisation is the amount of credit you are using compared to the total amount of credit you have available. Keeping this low is beneficial.
- Pay down your debt as quickly as possible to improve your credit score.
- Avoid opening or applying for multiple credit accounts. Opening too many in a short space of time suggests to lenders that you have a pattern of applying for loans.
- Register on the electoral roll.
- Review your credit report regularly for any errors and dispute any that are found.
- If you have never borrowed before, surprisingly, this can also lower your credit score. Our blog here outlines ways to build credit history when you’ve never borrowed before.
For more advice and tips, sign up for our money tips below.