Understanding your credit score

National Credit Education Month was founded to increase awareness about the importance of building a positive credit profile. Building and maintaining a good credit rating has a good impact on your financial future. Your credit score is what lenders and banks use to assess your ability to pay back whatever money you borrow and with a good credit score, you can qualify for the lowest possible interest rates when taking out loans.

To celebrate, we’ve compiled some information on understanding your credit rating, along with some tips on how to improve and maintain it.

What is a credit score?

A credit score is a number comprised of various data, including your payment history, balances owed, types of credit usage, and the length of your credit history. Each credit reference agency has a different method for working out your credit score, but they all use your personal information (such as your address), along with your financial history to see how likely it is you’ll pay back any money you borrow. Even small things, like how often you apply for credit cards and loans, can affect the rating of your credit report.

The higher a credit score, the better. Potential creditors use this information to estimate whether a borrower will pay back a loan. Being creditworthy makes it easier to rent an apartment, buy a house, or even land a job.

Information like race, sex, marital status, employment history or political affiliation are not taken into consideration when it comes to credit score.

 

Your credit history

Your credit history includes details on how many credit cards or loans you have or have had in the last 7 to 10 years, depending on the type of account and its status and if you pay your bills on time. Credit histories also list certain public records such as judgments against you and bankruptcies.

You might not have a credit history if you have not had a credit card, you have not gotten a loan from a bank or credit union. Without a credit history, it can be harder to get a job, an apartment, or even a credit card.

 

Improve and maintain your credit score

Improving your credit score can have a range of benefits, from accessing better deals to increasing your chances of mortgage approval. It can take time to see change, but there are steps you can take to boost your chances of hitting a higher score.

• Register to vote at your current address so that lenders can confirm your personal information on any credit applications.
• Stay within your credit limits and make sure you pay bills on time. Paying your debts on time will have a positive effect on your credit score and can improve your access to credit. Setting up automated payments can be a good idea to avoid missed or late payments in the future.
• Don’t apply for too much credit in a short space of time. Every time a potential lender makes a hard inquiry to check your credit, your score goes down. That means you should avoid applying for too many accounts within a two-year time frame. Use an eligibility checker before you apply for a credit card as this avoids leaving a hard check on your file.
• Check your credit score regularly. Credit check agencies like Experian will send you a monthly update when you sign up, so you can stay up to date with your score.
• Get utility bills in your name, as having regular payments coming out of your account can help with building your credit.
• Pay off your debt, even if it’s a small amount each month, it is important to try to pay off debt. You can find out how to save money to help pay off your debt here.
• Get a credit card but be careful how much you spend. To help show that you have not borrowed too much, try to minimize how much you owe in relation to your credit limit. Lenders look at the ratio between your total debt and your income. If the debt you’re carrying is too high, your default risk goes up.
• Make sure you have a long-term credit record. Having a short length of credit could happen if you waited until you were older to obtain credit, or had accounts closed in the past. Strive to get and keep credit accounts long-term. 

 

Access Your Credit Report

It’s important to get into the habit of checking your credit regularly. Checking several months in advance gives you time to address any problems on your credit report before submitting any financial applications, plus regular checks and clear planning will help you to reach or maintain your credit profile objectives.

You can get a free copy of your credit report from each of the major credit reference agencies,ClearScore.com, Equifax, Experian, Checkmyfile. Some are free to use, and some offer a free trial, so you can access your credit report without spending any money.