Your credit rating, which can also be referred to as your credit score, is something which is often talked about or used in adverts and credit applications – but what exactly does it mean, how are they calculated and why are they important? Hopefully by the time you have finished reading this you should understand more about them and how to improve or maintain your own rating.
What is a credit rating?
A credit rating is a 3 digit number which shows how you have handled credit in the past and is therefore a good indicator of how you will handle credit in the future. Lenders use your credit rating to help them come to a decision when you make an application for a credit facility, such as a loan, credit card, mortgage or an overdraft. The higher your credit rating, the better you have handled credit in the past and therefore the more likely you will be accepted for credit.
Why is a good credit rating important?
A good credit rating is a big indicator on how successful you will be with a credit application, however it is not only the success of credit applications that can be affected by it. If you work in financial services for example, prospective employers may ask to check your credit rating before offering you a job, insurance companies can check your credit rating when you apply for insurance and this can affect your offered rate and your mobile phone or internet provider will also check your credit rating before agreeing to offer you their services.
What improves your credit rating
There are a few easy ways to improve your credit score, which starts with ensuring you are on the electoral roll at your current address. This ensures accuracy for a creditor when confirming your identity and your current address, which reduces their risk when you make a credit application. The less risk involved to a lender when you make a credit application, the more comfortable they will be at lending you the credit.
If you have existing credit facilities, like a loan or credit card, ensuring you pay your repayments in time each month helps show you are a responsible borrower and improves your credit rating.
Paying your household bills on time can also improve your credit rating, as many utility providers now report to the credit rating agencies, so this will show that you are responsible at repaying bills.
What reduces your credit rating
There are also ways your credit score can be reduced that you can actively try to work towards minimising, so they do not apply to you. The first you should try to achieve is to keep your credit card balances as low to a % of the total limit as you can, and ideally no more than 25-30%. So, if you had a credit card with a limit of £3,000, you should attempt to ensure your balance is no higher than between £750-£900 every month. If your credit card balance % reach the levels of 80-90% or greater of their total balances, then this will have a particularly detrimental effect on your credit rating, as it shows that you are currently struggling to reduce your credit balances and therefore is a sign that you could be in financial difficulty.
Your overall level of unsecured debt can also reduce your credit score, with some credit reference agencies indicating that total unsecured debt of £20,000 or higher can make a small impact on your credit rating regardless of your repayment history as you may be a higher risk for further lending.
Making multiple credit applications in a short period of time is another trigger that can reduce your credit rating, as it can indicate you are desperate for credit and therefore currently higher risk.
You should also regularly check your credit report to check for mistakes, as lenders can occasionally get things wrong. If this happens, by engaging with the credit rating agency and the lender these mistakes can be addressed which will correct your credit rating once again.
However, the major impactors on your credit rating however are missing repayments on a loan or credit card, with multiple offences in succession of each other particularly adverse to your rating. A CCJ or defaulting on an account is also particularly detrimental to your credit rating, along with an insolvency procedure such as bankruptcy.
I have been turned down for credit because of my credit rating, what can I do?
If you have been turned down for credit, then it’s unlikely that an application with another lender will be successful. Your credit rating will have been impacted by the search and refusal from the first debt credit application, and lenders generally have similar criteria for credit ratings when accepting applications.
If you have been seeking further credit, this may be as you are struggling to maintain the repayments on your existing debts or are unable to manage your outgoings without taking further debt. This is a sign that you should seek advice on what options are available to help you with your current debts before your situation deteriorates further.
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