For most people, there will come a time when you need a little financial help. This won’t necessarily be because your money management skills are poor; in fact, it may be quite the opposite. It might be that you’re looking to fund your dream holiday but don’t want to spend all of your savings at once, or that you need some extra capital to expand your business but don’t wish to overstretch yourself. Irrespective of your reasons, if you approach borrowing sensibly, there is nothing wrong with it.
However, it’s important that you pick a reputable lender to borrow from, and in order to meet their criteria, you’re probably going to need a positive credit rating, or a guarantor who can fulfil this requirement on your behalf. Thus, it’s important to understand what factors will affect your credit score. Here are five that you need to know…
#1: Payment History
As a general rule, credit scores are calculated according to a variety of factors, with the most important generally considered to be your payment history. This is one of the main reasons that a non-existent record can often count against you almost as much as a poor one, because it means that you’re an unknown quantity. Provided that you can show a history of making repayments on time, whether these are linked to credit cards, retail accounts, or instalment loans, you’ll be off to a strong start. On the opposite side of the coin, negative events such as bankruptcy will count against you, although as the years pass, the effect of these will lessen.
#2: Credit Utilisation
Credit providers will also want to look at how much you already owe, irrespective of who you owe these amounts to. If, for example you are only repaying the minimum monthly amount on credit cards, or if you are always close to your credit limit, this will drag down your overall score. This is because it can be very dangerous to overstretch yourself with regards to borrowing, so the more you have outstanding, the higher the risk you will be seen to pose.
#3: Longevity of Your Credit Record
Many people will tell you that your age may count against you when you apply to a credit provider, with this being more detrimental the younger you are. This is largely because older applicants typically have a longer credit history, and have thus proved their reliability or otherwise over the course of many years. Thus, providers feel that they can gain a more accurate portrayal of their borrowing behaviour than they can for people with little or no credit history, for example. However, even if you are within a younger age range, this will not exclude you from borrowing, assuming that you have thus far exhibited dependability.
#4: Credit Applications
Another factor that providers will take into account is the number of times that you’ve applied for credit, with recent or numerous applications likely to count against you. This means that every time a potential lender calculates your credit history, your overall score is likely to decrease. The number of points knocked off will probably be minimal, so don’t be overly concerned by this; just understand that it’s important to keep this piece of information at the forefront of your mind if you’re considering making an application. Many lenders now use what is called a ‘soft search’ or quotation search when assessing credit applications. These searches do not have any negative impact on your credit score so it is worth checking with the lender before you apply.
#5: Varied Credit Types
For those looking to improve their credit score in advance of making an application, it’s also handy to consider that lots of lenders like to see a varied borrowing history. By this, we mean that having a few different credit types on record can help to improve your overall total. Thus, it’s often handy to take out a credit card, for example, one to two years before you start making mortgage applications. If you can also add a personal loan to your tally, or something of that ilk, even better. Of course, the trick is to not overstretch yourself, so that all of your repayments can be seen to have been made on time. This will help to portray you as an experienced yet sensible borrower, and an ideal applicant when looking to extend credit.
When applying for a loan, mortgage, or any other type of credit, it’s important to understand what sort of factors lenders will use to assess you. This will enable you to tick their boxes in advance of being evaluated, and thus increase your chances of making a successful application.