Why is your credit score so important when taking out finance?
Why is your credit score so important when taking out finance? If you’re credit score is a little on the low side, you may be wondering how it actually affect your ability to get finance. Or, if you’ve previously been declined, you’ll know how your credit can impact your financial life. Building good financial habits by keeping debt low and making any payments you owe on time and in full, is a great way to show future lenders that you can be trusted to handle your credit. The guide below looks at why your credit score is so important and also how to increase your score too.
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What is a credit score?
Your credit score is essentially a reflection of your ability to manage your money. When you miss payments, make late repayments, or have court orders against you such as CCJs, it can be detrimental to your credit score. When you mishandle credit or finance, it can put future lenders off as you’re more likely to default on your finances again. Your credit score is really important when it comes to applying for car finance, getting a mortgage, or having a credit card as it can affect the likelihood of approval and also the rates you are offered.
How do you check your credit score?
If you’re looking to check your credit score, you can do so by using one of the three main credit referencing agencies in the UK. They are Experian, Equifax, and TransUnion and each use their own scoring scale. What one agency sees as good maybe fair to another so it can be worth checking your score with each. You can do this for free,but some may charge you extra for additional features.
Why are credit scores important?
There are so many reasons why your credit score can benefit your financial life and it can be a good idea to take some time to work on your credit score if it’s a little on the low side.
- Easier acceptances. When you apply for car finance online, you will usually be required to undergo a credit check. The result of this credit check then helps the lender to determine whether they want to offer you finance or not. When you have a low score, it increases the risk and may result in your being declined.
- Better finance rates. Lenders can reward applicants for having a better credit score because they are less likely to default on their finance based on their past behaviour. Lower interest rates mean you don’t pay as much back, and it can help to save you money in the long run.
- Higher credit limits. When you get a credit card or if you have an account with a retail company, having a better credit score can get you higher credit limits and gives you more negotiation power.
How to improve your credit score:
If you’re credit score is a little bleak or if you have not had chance to build a credit history yet, don’t worry! There are easy in which you can help to improve your credit score.
- Make payments on time.One of the easiest ways to prove your creditworthiness is to make all your current payments on time and in full. By keeping on top of your finances, you can help to increase the likelihood of getting approved and also give you access to the best car finance deals with the lowest interest rates offered.
- Reduce debt. Your credit score also considers how much money you currently owe. When you have high level of existing debt it can be hard for lenders to know whether you can be trusted to pay back your loan and if you can afford to take on anymore credit. It’s always a good idea to try to reduce the amount of credit you owe first before you take on any more finance or credit.
- Keep credit usage low. Your credit utilisation ratio is how much of your available credit you are using. To help increase your credit score, you should try to keep your usage under 50%. So, if you have a credit card limit of £1000, you should try to only spend around £500 of it at a time. Then pay your credit card off each month on time and in full.