How do credit scores affect your financial life?

Your credit score is a really influential part of your financial life and part of getting your finances in order can be sorting your credit out. People with bad credit scores may already know the affect they can have on getting access to loans and finance and you may even be declined finance if your score is too low. Having a good credit score can have a whole range of benefits such as higher credit limits and lower interest rates when applying for loans but how exactly do credit scores work and why is it so important to have good credit? Let’s find out!

What is a credit score?

A credit score is a numerical bit of data which can be found when you check your credit report. Credit referencing agencies use a number of factors to calculator your score, but the most common factors include your ability to make payments on time, credit usage and history of handling credit responsibly to name a few. Your credit score determines your worthiness for future loans and finance, based on your previous history of borrowing.

What is a credit check?

When we talk about credit scores, a credit check usually isn’t far behind. Potential finance lenders want to know how good you are at managing your credit by looking into your financial history. A credit check may be performed when you apply for any sort of finance, mortgage, car loan, credit card or even a mobile phone contract. There are two types of credit check which can be performed. A soft credit check for finance UK is a tool used by lenders to take a look at your credit report without harming your current credit score and only gives them access to some of the information listed on your file. A hard search on the other hand gives access to your full report and lets lenders see everything that’s listed on there. Multiple hard searches on your credit report in a short space of time can have a negative impact on your credit score.

Why is credit score important?

There are a number of scenarios in which a lender may want to have a look at your credit score. A credit check then helps lenders to determine whether they want to accept you for finance or not. A good credit score and a long history of managing your money responsible means you are less of a risk to lend to and based on your previous behaviour, you’re likely to meet the rules of your future finance agreements too.

1.     Lower interest rates.

Many loans and finance come with interest to pay, and a lower interest rate means you pay less money back to the lender in interest. Having a low credit score could see you face higher interest rates as you are more of a risk to lend to. Lenders usually reserve their best APR car finance rates for people with good or excellent credit as a reward for their past behaviours.

2.     More availability.

A good credit score makes you more favourable to lenders and it can mean you get access to more lenders than people with lower credit scores. Having multiple finance offers available to you means that you can select the best lender with the lowest interest rate and get the best deal possible.

3.     Better housing options.

Both landlords and mortgage lenders will perform a credit check on your before you can get access to somewhere to live. Mortgage lenders are especially strict as they loan a massive amount of money out for people to buy a house. However, landlords also want to know if you can be trusted to make your rent payment each month and can reject your application if you have history of missed or late payments.

4.     Higher credit limits.

You are more likely o get offered higher credit limit on credit cards and store cards when you have a good credit score. This is because you’re less likely to default, based on your history of borrowing and have shown you can manage credit responsibly. However, to help keep your credit healthy, you should only sue around 50% of your available credit limit. Using too much of your credit can negative impact your credit score.

Easy ways to improve your credit score:

• Make any current payments you have on time and in full.
• Keep your credit usage low.
• Avoid taking on new credit when you’re trying to rebuild your score.
• Clear or reduce any existing debt you have before taking on anymore.
• Remove any financial associations on your credit file which you no longer have active credit with. You may become financially linked when you take out a joint application with someone else and their bad credit score can harm yours too.
• Build a small credit history if you don’t already have any evidence of borrowing and pay it back on time and in full.
• Check your credit report for any mistakes or information that isn’t up to date.