The use of credit cards is rampant in this day and age. Credit cards are being used for a variety of purchases. If you plan on using credit cards and availing of loans, you need to familiarize yourself with the concept of credit scores.
What is a Credit Score?
Lenders use a credit score to determine an individual’s creditworthiness. If you have a high credit score, your lender will consider you a low financial risk, which means you stand an excellent chance of getting the loans you want, and at reasonable interest rates.
There are primarily three well-known Credit Rating Agencies (CRA) in the UK, which are Experian, Equifax, and TransUnion. These agencies keep track of your credit history and calculate a credit score based on the information stored on your credit report.
Always make sure you check your credit score before you apply for a loan.
What are the Benefits of Having a Good Credit Score in the UK?
If you have an excellent credit score, you should have no problem cementing your position as a low financial risk in the eyes of the lenders, which, in turn, will boost your chances of getting your loan applications approved.
Here are a few advantages of having an excellent credit score:
1. Low-interest Rates
If you have a low credit score, you can get loans at reasonably low-interest rates, which means that you can repay them on time without having to spend extra money.
2. Higher Credit Limit
You also stand a chance at getting higher loan amounts. You can use this money to finance any significant investments you have.
What is a Good Credit Score in the UK?
Since each lender uses a different approach, there is no standardized way to determine the ideal credit score. Furthermore, all three CRAs have different credit score ranges.
However, for the most part, this is how it works:
- Excellent (961 – 999): While there are no guarantees, you should have no problem getting the best loans, mortgages, low interest credit cards, and so forth.
- Good (881 – 960): Getting most loans, mortgages, credit cards, and deals should be a breeze, but the best ones may be out of reach.
- Fair (721 – 880): Since your credit score is decent, you may be able to land a few deals at reasonable interest rates.
- Poor (561 – 720): You could get your hands on certain credit cards, loans, and mortgages. However, they will most likely come at high-interest rates.
- Very Poor (1 – 560): If your credit score is in this range, you will most likely have your application for credit cards, loans, etc. rejected.
How to Improve your Credit Score in the UK?
There are a few things you can do to improve your credit score. However, this will not happen overnight.
1. Register on the Electoral Roll at your Present Residential Location
By doing this, you are making it easy for lending organizations to confirm your identity, permanent address, etc, which is what you want to improve your credit score.
2. Make timely payments and pay in full every month
If you want to increase your credit score in the UK, you need to pay your bills on time and avoid defaulting on the amounts. If you do this, lenders will assume you are a low-risk applicant.
3. Minimize your credit use
Your credit utilization shows the credit limit you use. Be sure to lower your credit utilization if you want to increase your credit score. CRAs like Experian recommend that you keep your credit utilization to 25%.
4. How do you maintain your Credit Score in the UK?
You know how to improve your credit score. But, how do you maintain it? It helps to start with a decent credit score.
5. Stop making too many credit applications
Applying for credit frequently during a short duration is a terrible idea as lenders might think you are desperate for a loan or credit card, which will make you seem like a high financial risk. This will not reflect well in your credit score. Minimize your credit applications.
6. Terminate your unused accounts
Here’s another thing you can do – close your unused accounts. If you do not, your lenders may assume that you will be unable to manage your finances should your credit amount go up.
7. Do not default on your payments
Be sure not to default on your payments. Defaulting on your payments does a lot of damage to your credit score.
8. Delinquent Account
If you make payments after the deadline, you run the risk of your account being termed delinquent.
9. Timely payments
Ideally, you should make every payment on time. The more you delay, the more interest you will end up having to pay. You also run the risk of missing your deadlines or defaulting.
10. Borrow within your means
Want to maintain your credit score? Be sure to apply for loans that you know you can handle. Biting off more than you can chew will land you in hot water. If you borrow large amounts that you will not be able to repay, you will find yourself in debt, and this will reflect in your credit score.
There you have it – a quick guided tour of credit scores for the average Joe. Be sure to follow the tips mentioned here and you should have no problem maintaining a high credit score in due time.