We hear lenders talk about ‘credit score’ or ‘credit rating’ and most of us know that it’s something to do with whether we’re likely to be able to get a loan. What most people don’t know, though is that in many cases you can affect your own credit score.
Your credit score is, similar to a sports score, simply how many points you’ve earned based on how you have been managing your finances. Like in sport, the aim of the game is to get the highest number of points.
The banks and credit providers analyse different pieces of information about you to come up with a ‘score’ for you, between 0 and 1,200 points. They will then decide whether they are willing to lend to you, or decide that you’re too risky. They usually expect you to score at least 600 points.
How can you affect your score?
There are lots of different pieces of information that are used. Based on the many home buyers I have helped, the main ones that I have found to influence your score are these:
It’s great to shop around to get the best deal. But – if you apply for loans and don’t take them out this can be pretty bad for your score. If you applied for 5 different loans over 6 months, just to check out rates and payments, it can knock a massive 300 points off your score! So the best thing to do is research what you want before making any applications – and try to make only one application. A broker can do research on your behalf too which can help you to compare what’s out there.
Late Paying Bills
Paying your bills on time is really important – even just forgetting for one or two days can reduce your score. Banks are looking at whether you’re likely to pay them back and paying late, or missing payments altogether indicates that you are less likely to pay them too.
Being Maxed out
How close to your credit limit are you? If there’s not much difference between what you owe and your limit, this can, again, reduce your score.
You can’t change how old you are – but your age is another piece of information that banks look at. The older you are, usually the better credit score you have. This is purely because you’ve got a longer ‘track record’ and if you were going to have financial problems you probably would have had them already! So, it can all sound a bit scary but now you know the basics you can understand more about your own credit score. You can find out more. But take care. Getting a copy of your credit report is a great idea – but using ‘Free’ credit report sites can reduce your score. If you’re seriously thinking of applying for a loan, request a report directly from Equifax instead, or just talk to your broker.
- Make sure you pay your bills on time – plan or save each month to make sure you have enough money to pay
- Shop around, or even better, get your broker to do it for you. But don’t apply until you’re sure you’ll take the loan out