How To Improve Your Credit Score
If you are looking to obtain a mortgage or seeking another form of borrowing, you might have encountered problems with your credit score. The truth is, no one has a perfect credit score and there are always ways that anyone can improve their credit rating.
This guide explains credit scores alongside factors that negatively impact your score. By understanding what may be harming your credit file, you can rectify the problem and improve your credit score.
Let’s explore credit scores in more detail.
What is a Credit Score?
A credit score is a score attributed to you by credit reference agencies. Each agency uses different metrics to calculate your credit score and you may find your score differs significantly from one agency to another.
Credit reference agencies share your credit report with lenders so that they can evaluate your financial history and how risky it is to offer borrowing to you.
Once again, there is no golden rule and lenders operate different credit score thresholds with some being very strict and other lenders being more flexible. Lenders also use different credit reference agencies to obtain your score. If you find your score is good with a particular credit reference agency you might be better off applying to a lender who uses that agency.
Why Does a Good Credit Score Matter?
When it comes to lending money, a lender is primarily concerned with risk. If your credit score is good a lender is more likely to accept your application and offer a favourable interest rate.
If you are a riskier proposition for a lender, they might decline the application altogether or offer you a product with a higher interest rate.
A good rule of thumb is the better your credit score, the better the interest rate you can expect. You should think of the interest rate as a penalty reflecting how much risk you are to a lender. If you are a high-risk borrower, the interest rate (penalty) will be higher compared to a low-risk borrower. Loan-to-value has a significant impact on the interest rate available.
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Why Should I Improve My Credit Score?
Typically, improving your credit score has a few benefits:
- You are more likely to be accepted by a wider range of lenders
- You may be offered a better interest rate
- The total cost of borrowing will be cheaper if the interest rate is lower due to your improved credit score
With mortgage applications your credit score is particularly important. There are only a small group of lenders who accept adverse credit mortgage applications and the interest rate can be significantly higher than a comparable high-street mortgage lender.
When you factor in how much you are likely to borrow with a mortgage, having a poor credit score can be the difference between paying tens of thousands in interest and hundreds of thousands in interest.
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Ways to Improve Your Credit Score
Fortunately, there are a few ways to improve your credit score and surprisingly, some of these ways don’t include parting with money.
Below we outline the key areas that impact credit scores and how to remedy them to improve your credit score.
High Impact Credit Score Issues
High impact issues will your credit score dramatically. Examples of high impact issues are:
- Defaults, County Court Judgements (CCJs) and Missed Payments
- Operating Close to your credit limit
With defaults, CCJs and missed payments you should always seek to repay the money owed as soon as possible. If you are not in the position to repay the money, contact the company and come to a payment arrangement.
Discussing your financial situation with a lender can prevent a missed payment or default from becoming a more serious CCJ.
If you are operating close to your existing credit limit you can take one of two actions to remedy it:
- Extend your credit limit (if this is available at no extra cost)
- Repay money so you are inside the good credit limit area
Typically, you will need to be using up to 25% of your credit limit for you to be operating optimally with your credit score. That means if you have credit cards with available borrowing of £10,000 you should aim to be using £2,500 at most.
The closer you get to your credit limit the higher the impact it has on your credit score.
Medium Impact Credit Score Issues
Medium impact issues will drop your credit score noticeably. Examples of medium impact issues are:
- Having multiple addresses or people financially linked to your credit profile
- Not being listed on the Electoral Roll at your address
Thankfully, both of these aspects can be resolved without spending money. You should contact the credit reference agency and advise them of anyone you no longer have a financial relationship with and ensure your finance agreements are in your latest address.
The address you use for your finance agreements should be the address where you register to vote.
Low Impact Credit Score Issues
Low impact issues will have a minimal or temporary impact on your credit score. Examples of these include:
- Applying for new finance
- Opening a new credit account
- Having multiple hard credit checks on your credit profile
TLow impact issues normally only have a temporary impact on your score and once three months have passed from the last action you should notice your score return to normal.
For reference, three or more hard credit checks on your credit file in a three-month period will negatively impact your credit score.
Speak to a Mortgage Broker
You can forward your credit file to a mortgage broker who can assess your credit score and any areas you can improve to help with your mortgage application. Most mortgage brokers can also arrange mortgages if you have adverse credit.
Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Broker. Boon Brokers provides fee free mortgage advice.
Book your Boon Brokers mortgage consultation to discuss your credit score and your mortgage requirements today.