Credit scores are important aspects of your financial life. Your ability to get credit will affect whether you can buy a car or a house. If you have big dreams for your personal finance future, you should understand how your credit score can make these things come true or it can definitely be an obstacle. Let’s look at the basics of your credit score and what you should know about it.
Credit score definition
Your credit score is a number than an external agency gives you to let your creditors, debtors and anyone who will lend you money in the future what your creditworthiness is like. For example, if you want to buy a brand new car, your credit score will determine whether you are essentially responsible enough to buy that car. This is done by looking at how good your credit score is. Anytime you want to borrow something officially, your creditors could do a credit score check which means using a third party to find out what your credit rating is like.
How is a credit score calculated?
Different agencies have different ways of looking at how your credit rating should be judged but a general rule of thumb is it is like a cocktail of different ingredients that come together. Here are the essential parts of how a credit score is calculated:
- How much debt you have: Lenders will look at the amount of debt that you have at the moment to decide whether your credit score is right for you to get a loan or a mortgage. Theexternal third party puts a lot of weight on how much current debt you have. For some credit score companies, this part of your rating can make up to as much as 30%.
- How often you pay your bills: We have all had moments when we have been late to pay our bills. This can be anything from electricity to water bills. Just know that this affects your credit score. Even if you pay your bills eventually, they can definitely put a big dent in your credit rating. Third party credit score companies and lenders think this is important which is why it features up to 35% of your final credit score.
- Amount of credit you are requiring: This is another important feature of your credit score. Lenders like to know if you are invested in getting loans elsewhere. If they look through your history and see that you have a few credit requests that are pending, this could affect their ability to give you a loan. As a general rule of thumb, you should keep the amount of credit requests you have to a minimum. For example, if you apply for a loan one place and then you are waiting to hear back, don’t rush to apply for another loan from another lender.
- The types of credit you have: As we know, credit comes in all shapes, sizes and flavours. Lenders will assess whether you have personal loans or if you have credit cards. All of these play a role in whether you will get approved or not so make sure that you know exactly the type of credit that you will be getting.
- Your history with credit: This is probably one of the most important elements of credit. Your lender wants to see that you have a history with credit because they want to know that you can handle it. This doesn’t mean that they want to see a bad history; they just want to know that you can apply for a loan, pay it in full and keep going from there.
How to repair a credit score?
There are many ways that you can repair your credit score. You are more than welcome to check our free Credit Score Facebook App to get some idea of your credit score.
We have some of the best ways to sort out your credit score below:
- Start paying your bills on time: This is one of the most important things that you can do. Don’t wait for your creditors to send you a reminder letter. Always pay on time to improve your credit rating.
- Create a payment plan: Know how much you owe to your creditors and make sure that you have a payment plan so you can keep up with what you need to pay them. This will stop you falling into debt.
- Don’t apply for lots of credit: One thing you shouldn’t do is apply for a lot of credit at the same time. Lenders like to see that you can manage a loan at a time, instead of drowning in lots of loans. Only have one credit card that you use for emergencies, for example.
- Always pay off debts that are growing: Avoid accumulating debt – this is the number one thing that you need to do. If you accumulate debt, you are going to hurt your credit score. Read this post about how to save and become happier person!
- Only close an account if you have paid it off: Something people do is closing accounts that they owe money on thinking that the problem will go away. You should only close an account when you have paid it off in full.
Why are credit scores so important to get a mortgage even if I have a deposit?
Credit scores are so important because they act as an anchor for your finances. We all know how difficult it is getting on the property ladder. Don’t make it harder for yourself by having a credit score that is not good enough for you to get approved. Even if you have a deposit ready for the bank to take for your dream property, this does not necessarily mean that you will get approved because the bank will see if your credit score is worthy of you taking on a loan. For example, if you have a poor credit score, you should not apply for a large mortgage because the chances of rejection are higher. This is why it is so important for you to have a good credit score even with a cheap mortgage.
What credit scores can be used for?
- Buying your first home with a mortgage
- Applying for personal loans
- Getting a business loan so you can start your own business
With these tips, you can understand all of the levels to your credit score. It doesn’t have to be something that you don’t understand – with our explanation, your credit score is something that you can embrace.