Your credit score is really important when it comes to your financial life. Your credit score can be affecting acceptance rates, interest rates and how much you pay for things like car finance, loans, and your mortgage. Due to this, it’s important that you keep your credit score in good health. But what happens if you have a bad credit score and how easy is it to fix it? There’s no quick fix to rebuilding your credit score and it can take time but the benefits of having a good credit score are worthwhile.
Why is your credit score important?
Your credit score reflects your creditworthiness, and your score is calculated by a number of factors such as repayment history, number of credit accounts, amount of debt you owe and other factors. If you have a good credit score, you are more likely to get approved for loans, get access to low car finance rates, better mortgage terms, higher credit card limits and more. Working on your credit score and maintaining a good score can make borrowing cheaper and also make it easier to get accepted. Lenders will usually require you to pass a credit check when you apply for loans or finance and if you have a good score, you are seen as less of a risk to borrow to.
How do you end up with a bad credit score?
If you have a bad credit score, you may know exactly where it went wrong. However, many people may be surprised when they check their score to find it’s a little on the low side. There are a number of factors which can result in a bad credit score. And common causes include, missed or pate payments, declaring bankruptcy, having a default or CCJ on your credit file, having high levels of debt and having no credit history. Having a bad credit score can then impact your ability to get finance or can mean you get charged higher interest rates as you are more of a risk to lend to, based on your credit history.
How to rebuild your credit score
If you have a bad credit score, the guide below can help with tips on how to rebuild it.
Make payments on time
Your payment history is one of the biggest influences on your credit score and late repayments can stay on your credit file for as long as 7 years so it’s really important that you keep on top of your repayments. If you forget to make payments on time, it can be beneficial to set up direct debits to pay back your loan or credit card repayments. If you know you can’t make your current payments, its best to speak to the lender directly to see how they can help.
Reduce your credit usage
Your credit utilisation ratio is how much of your available credit you are currently using. Best practice recommends that you only use around 50% of your available credit limit. For example, if your credit limit is £2000, you should only spend around £1000 and under. If you really want to excel for you finances, you should try to use around 30% of your available credit limit. You should then use your credit account to make small purchases and pay them back each month on time and in full.
Check your score regularly
To start to rebuild your credit score, you should know where you stand. It’s recommended that that you get into the habit of checking your credit score and credit report regularly on a monthly basis. When you do, you should make sure all your information is accurate and up to date and there’s no mistakes on your credit file. Having incorrect information can negatively harm your credit score. You should also view any applications you have made for finance and make sure they all look correct, if not, you may have been the victim of a fraudulent application in your name.
Avoid hard search
Hard searches are a type of credit check that allows a lender to take a full look at your credit report and it’s reported on your credit file. If you are shopping around for the best rates, for example when applying for car finance, you may make multiple applications with different lenders. However, multiple applications for finance in a short space of time can negatively impact your credit score. Alternatively, you could consider using a car loan calculator to work out your loan before you get approved. Based on real customer data, you can see what type of loan you could get before you even apply!
Clear existing debt
In order to get approved for finance, lenders will usually look at how much debt you currently have. Having high levels of existing debt can put lenders off and also make it harder for you to manage the finance you already have. Where possible, you should try to clear any existing debt you have before you commit to taking on more.