Credit scores can be a bit confusing if you haven’t got your head around personal finance yet. They’re referred to widely by financial institutions and lenders, and they play an important role in determining your chances of borrowing money in life. Fortunately, below we’ve put together a little guide to help you understand credit scores and what to do if you know you have a bad one.
What is a credit score?
A credit score is a financial rating given to you by credit reference agencies. There are three main ones in the UK – Experian, Equifax and Transunion. These agencies gather and store data on your financial and borrowing history to give lenders an idea of how trustworthy you are when you are applying for credit, loans or mortgages.
Your credit score is unique to you, although financial records can become linked in the event of joint bank accounts, joint loan agreements or joint utility accounts. Others can’t typically impact your individual credit score, however, being financially associated with someone who has a poor credit history can impact your ability to take out credit or be approved for loans.
What can give you a bad credit score?
So, what can negatively impact your credit score? There is a range of things that can do this – but some are more common than others.
Missing scheduled payments or making late payments to lenders can leave a default on your credit record and this can impact your score for years. Being near your credit limit or having high sums of debt can also make you a less reliable lendee because you have other financial commitments to pay off.
Having little to no credit history can also impact your credit score because you have no record of your ability to take out credit and pay it back reliably. There are a range of other factors that can make a difference, so do some further research yourself if you’re interested.
Can I loan money if my credit score is bad?
It’s not impossible to loan money if you have a poor credit history, but it may be more difficult and you’re likely to be charged more interest because the lender is taking on a bigger risk and therefore needs a bigger payoff.
You’re probably better off trying to loan money from friends or family until you can improve your credit score, or borrowing money against the value of a valuable item. Avoiding credit agreements and short term high interest loans where possible until you can afford to pay them back comfortably will help you to rebuild a healthier credit score.
What to do if you have a bad credit score
If you do have a poor credit history or you’ve seen you have a low score from one of these credit reference agencies, don’t fret, there are ways you can change your situation. One easy win is to ensure that all your personal details such as current and previous addresses are up to date and to spot any mistakes or false information on your credit report.
Another effective way to improve your credit score is to pay down any debts you have, which will help to reduce your credit utilisation level. Alternatively, you can increase your credit limits without using more to distance you from those limits.
Besides this, make sure you make all your bills and payments on time going forward, avoid accruing any more medium to long-term debt (unless absolutely necessary) and start to build a healthy credit history by utilising credit in increments and paying it back in good time.