If you’re applying for a loan, mortgage or credit card, it’s likely your lender will want to check your credit rating. But what exactly is a credit rating, and what happens if yours isn’t up to par?
What is a credit rating?
Your credit rating is used by finance providers to assess the risk of lending you money. They do this by looking at your history of debt and your ability to keep up with regular payments.
Why might I have a bad credit rating?
There are many reasons why you might have a less than healthy credit score. Here are a few examples:
• You made a late payment, missed a payment, or paid less than you should have– whether it’s a one off missed gym payment or a late credit card bill, this will all affect your final score
• You chose the wrong credit card– make sure you choose a card that has a credit limit, interest rate and fees that help you keep up with repayments. The better your credit score, the better credit deals you’ll be offered
• Paying the minimum– when you’re paying off a credit card debt, it’s always a good idea to pay more than the minimum. Not only will you spend less on interest in the long run, but you’ll improve your credit score at the same time
• You have no credit history– sounds strange, but if you’ve never taken out a credit card or borrowed money before, it can be difficult for lenders to judge how trustworthy you’ll be with repayments
How can I improve my credit rating?
If you’re looking to apply for a loan (such a business loan or mortgage), it’s a good idea to start building up your credit score at least 6 months in advance. How, you ask? It’s as easy as 1, 2 3…
1. Get organised
Take stock of your outgoing payments to avoid missing payments. If you share a house and the bills don’t go out of your account, suggest dividing the responsibilities differently. Regular payments such as Direct Debits, household bills or mobile phone contracts give credit agencies more confidence in your payment habits.
2. Check your history
You can check your credit score anytime for free using sites like Experian, Equifax or Clear Score. If your score is lower than expected, you can pay a small fee to get your full credit report. This will help you identify any inaccuracies and give you the chance to add notes to your file explaining any special circumstances.
3. Get registered
Signing up to the electoral role is quick and free, even if you live with parents or in a shared house. This is an easy way for companies to confirm your name and address and helps credit companies feel confident that they could contact you if you were to miss a payment.