Your credit score uses statistics by lenders to conclude your creditworthiness. In other words, it can be used as a tool to indicate how much risk would be associated with lending you money and receiving timely repayments. It can help with or hinder your ability to access certain products, such as credit cards, loans and mortgages. This is why it shouldn’t be dismissed, as a poor credit score can hold you back in certain circumstances.
You can check your credit score online and make changes to your financial habits to improve it over time. But what do these financial habits look like? Here are some pointers.
Payment history is important for demonstrating that you have paid your accounts over the length of your credit. It’s important because it acts as evidence of repayment, making it a key part of your credit score calculation. The type of accounts considered for credit payment history include credit cards, mortgage loans and instalment loans. Late bill payments for example can hinder your payment history and therefore your overall score if this is a serious issue.
Credit usage, or utilisation, refers to the amount of revolving credit you’re using divided by the total amount of revolving credit you have available. Put simply, it’s the amount you owe divided by your credit limit. If you have a low rate, this means you’re using less of your available credit which is generally a good sign. This again, makes up a large proportion of how your credit score is calculated.
Your banking habits
Banking habits also come into play. If you have two or more current accounts and you find yourself using multiple overdrafts, this may suggest to lenders that your finances are somewhat limited, meaning you need to access additional funds. It’s better to compare savings accounts whilst identifying those with perks you will benefit from in your given circumstances. This might look like a good interest rate or instant withdrawal.
Diversifying your credit is another good thing to consider if you’re wanting to improve your credit score. Some people decide to benefit from the different perks on offer with different credit cards. Diversifying your credit mix can also take into account revolving and instalment credit. The former refers to making varying payments each month using credit cards, for example, whereas instalment credit refers to routine payments such as rent or energy bills due by a particular date. A blend of both can indicate to lenders that you are responsible when it comes to borrowing money and paying it back.
You should space out any applications for credit cards, otherwise, lenders may see multiple applications in a short period as a red flag, therefore impacting your credit score. These applications are known as hard inquiries, as you are asking for additional credit on top of what you already have. Meanwhile, ‘soft enquiries’ don’t have the same level of impact and can include requesting a copy of your credit report. Applying for a credit card only when you need one is a more sensible route to go down.
Maxing out your credit
If you reach your credit limit, which is the maximum amount of money you can borrow using a credit card, this information will be visible to lenders and other financial institutions. As with some of the other factors discussed, this can signal a poor grasp on managing and repaying credit. With this in mind, you should aim for a credit limit that is realistic for you.
How you acquire, spend and repay credit can impact your credit score, and therefore your access to certain financial products. This might involve getting a mortgage or applying for a credit card. Take the time to plan out your finances, carefully considering the choice you make at each step. You may thank yourself in the future!