One of the most crucial things you must get to grips with regarding finance is of course, the dreaded credit score. Although it’s just a number, it can have a big effect on your life, so it is a pretty important number to be mindful of.
What is a credit score?
It’s a numerical value that will calculate your creditworthiness. It shows how well you manage your finances, your capability to pay off a due amount and the nature of your payment. When you apply for a loan, money lenders ask for all such information in order to evaluate whether you will be able to repay a loan amount or not. On the basis of that, they will grant you a loan. Lower the credit score, lesser will be the chances of loan approval.
Also, if you are taking a loan from a bank, check that you have not been mis-sold a PPI policy along with the loan. This is important because in UK, numerous financial institutions like banks have mis-sold the policy. If you notice that you have been mis-sold the policy you can claim a refund for the same. For claiming a refund you have two choices, either you can take help of a claim management company or you can claim it yourself.
Factors involved in calculating a credit score
- Number of accounts
- Account types
- Utilisation of credit
- Length of your credit records
- History of your payment
Benefits of knowing your credit score
The majority of people overlook the importance of their credit score, which they only pay attention to while applying for a loan. It’s important that you check your credit score frequently, regardless of whether you have a financial requirement or not.
Doing this will let you know whether you are maintaining a high score or not. Even if you have no financial needs, it’s important that you take care of your credit report. If you notice that your credit score is reducing, you should look to take remedial measures before it starts to badly affect your financial reputation.
The credit report contain errors and erroneous information too. By monitoring your credit score, you can detect errors before it can damage your financial credibility.
Importance of a good credit score
Maintaining a good credit score can open a lot of doors for you in this monetary world. It just implies that you are not at a credit risk. This is not on the grounds that you don’t have any loans, but that you know how to pay them off steadily.
- Faster loan approvals: You never know when you may require urgent financing, so it’s better to maintain a good credit score from the start to avoid future complications. If you can prove to a lender that you can manage loan payments well, you can be granted an approval for a loan easily.
- Lower interest rates: Apart from quick loan approvals, you will also get the benefit of low interest rates.
- Opening accounts become easier: Financial institutions like banks and VISA card companies pay attention to credit scores when you go for a loan or for opening an account. Seeing how well you handle your funds can open many financial doors for you.
- Business partnerships: If you are a business owner, you will notice that a good credit score opens the doors towards more valuable partnerships.
How to improve your credit score?
Follow these habits to boost your credit score:
- Always pay on time: The history as well as the behaviour of your payment can affect your credit score. Therefore, making timely payments is important in order to enhance your credit score.
- Keep your old accounts: A long credit record with an older account shows steadiness.
- Avoid excess credit applications: Your score tends to decrease whenever you apply for credit. So, avoid doing it frequently as it shows your dependence on credit to pay your obligations.
- Check your report for errors: Many reports contain erroneous information. Numerous reports contain mistakes that lower your score. Check your credit report from at least three bureaus every year and send a dispute letter to them in case you observe any mistakes. You can get a free duplicate copy of your report once every year from the Yearly Credit Report Request Service.
- Take both secured and unsecured loans: Simply, loans are of two kinds: secured and unsecured. Loans such as car loans and home loans fall under the category of secured loans and personal loans, and credit cards fall under unsecured loans. If you always take the benefit of unsecured loans this will impact your credit score negatively. To get rid of such conditions, remember to take a combination of both types of loans.
- Keep track of joint applicant’s payment: Sometimes you can notice a decrease in your credit score even when you make timely payments. If you are a joint borrower for any loan taken by another person and that individual has not paid the instalments on time, it can adversely affect your credit report. So, make sure to watch the instalment pattern of your joint candidate as well.
- Don’t ask to erase the old debts: Sometimes, after the instalments of the old loan, people request the bank to remove the entire loan history, which can impact your credit score. The old loan amounts that you have paid on time are good for your score. So, don’t erase the loan records and leave them intact.
Myths about credit score
- More income means high credit score – The majority of people feel that if their income is high their credit score will also be high. No, that’s not true! Your credit score doesn’t rely on your income and your income is never written in the credit report. Your credit score depends only on your capability of paying bills on time and not your wealth.
- Don’t get a credit card, use only debit cards – People think that by making use of prepaid or debit cards they can boost their credit score. Remember that you need to maintain a credit record for a credit score. Your credit records will be NIL if you don’t take any credit.
- Closing your credit card accounts improves your credit score – It’s a myth that can negatively affect your credit score. Closing the account of your credit card can lower your credit use.
- With a bad credit score, no loan can be approved – If you had a bad credit score, your loan will never get approved – this is a common belief. Still, there are few companies that offer a loan to people having a bad credit score. Though, in that case, the money lender can charge a high interest rate or can ask you to put collateral if you fail to reimburse your loan amount.
- Carrying a balance will improve your score – This is a general myth that if you hold a balance in your credit card, you can enhance your credit score. That’s false. Doing this will decrease your credit score.
- Closing the card account will erase its history – Closing your credit card account will not remove its record. Your information will remain intact. Your details will stay in your credit report for a long time.
Understanding the importance of your credit score is a big step towards improving your financial situation, especially in saving considerable money on loans and interest rates.