Credit is central to modern living. Without it, you may not have such things as a home of your own, a car or even a mobile phone.
But things can go wrong with credit. At Continuum we are looking at why you need to manage your credit score – and how to improve it.
What is a credit score?
A credit score, also known as a credit rating, is a number that has been calculated on your credit history. It is a number between 300 and 850 and the higher it is the more attractive you look to potential lenders – because the more likely you appear to be to pay back money you borrow.
If you have a high score, lenders will be keen to lend to you and will offer the best rates to secure your business. A low score might mean that fewer lenders will be forthcoming, and those that do will want high rates of interest.
So, if you want the best rates when you want to buy a home, or anything else where you don’t pay upfront, you want as high a credit score as possible.
Businesses share details of financial transactions through Credit bureau. Any lender will consult them about your credit history, and the credit score. So you can’t simply go to a new lender and start with a clean sheet. The three main credit reference agencies, Experian, TransUnion and Equifax, all have a record of your credit rating. You can get a copy of your statutory credit file free from any of them.
A credit score below 640 is considered low and may make borrowing costly. 700 or above is generally considered good and may result in a lower interest rate, which results in their paying less money in interest over the life of the loan. Scores greater than 800 are considered excellent and may get the best deals of all.
What can you do if your credit score is low?
Failing to make repayments on a loan agreement can eventually lead to a County Court Judgment, or CCJ. One of these in your credit history will put your credit score through the floor.
But is not enough simply to repay. You need to repay on time. Even being late paying utility bills will be recorded and will detract from your credit score.
There are other factors to consider. The number of open accounts in your name, your total levels of debt and the number of applications for credit that you have made will all influence your credit score. But there is another less obvious factor. If you have never used credit in the past, for example because you were a student, you will have no credit history. Your credit score will be poor, despite the fact that you have never missed a payment in your life, because you had none to make.
How to improve your credit score
Fortunately, there are ways to start building up a good credit score.
The obvious answer is to ensure you never miss a repayment. Pay each instalment in full, ideally before it is due.
If you use a credit card, try to pay off as much as possible each month. Repaying more than the minimum will save you money – it should also be reflected in your score.
The less obvious answer is to actually use credit, so you can build a credit history. Take out a credit card from your bank as soon as you are eligible and use it very carefully for small purchases. Clothes, filling the car and train fares might be ideal. The important thing is to pay them off each month. This will ensure that credit will not cost you anything, but it will build up a pattern of financial responsibility to boost your score.
Managing your credit is part of planning for your future. So is getting expert advice.
If you cannot improve your credit score, all is not lost. At Continuum we can find specialist mortgage products for people with a compromised credit history and provide individual financial planning that can help you manage your money more efficiently.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a suitable mortgage product, you should seek independent financial advice before embarking on any course of action.
Your home may be repossessed if you do not keep up repayments on your mortgage.