Understanding Your Credit Score
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What is a credit score?
Before you begin to understand your credit score, it’s worth knowing what it actually is. Your credit score is a three digit number. This number corresponds to your likelihood of being accepted for a loan. Your credit score is decided by your credit report, which is a record showing your loan and repayment history – the higher your credit score is, the less of a risk you are.
Predominant factors affecting your credit score
Your payment history is the biggest influential factor on your credit report. If you have missed any previous payments on a loan, have a county court judgement, defaults or been declared bankrupt, then these will all have a negative effect on your credit score and therefore, tarnish your credit report.
The number of credit applications you make can impact your score and signify to lenders that you may be too much of a risk. If you have made a lot of applications in a short space of time, it signals that you may have been declined by different lenders or that you are financially dependent on loans. Both of which will be a huge warning sign to lenders that you may not be an ideal borrower.
Having a longer credit history can be more beneficial when applying for finance because lenders will have more information to base their decision on. A longer credit history works in your favour – even if you have missed payments that date back a long time ago If you have no recent defects on your credit report, then a lender may still consider you. In general, a longer credit history means lenders have more information to base their decision on.
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Check and correct
Checking your credit score isn’t something you should avoid, keeping in touch with it means you can monitor whether anything needs improving or more importantly, whether anything is incorrect. Without knowing, you could have an incorrect penalty put against you which could be tarnishing your score unnecessarily. If you spot something on your report that is incorrect, then you need to contact the company it concerns and they will correct it accordingly. Check your credit score via a credit reference agency, such as Experian, Equifax or Noddle.
Having no credit score
A common misunderstanding surrounding credit scores is that not having one is a good thing. While it technically means you haven’t been in the financial position where you need a loan, lenders don’t favour it because they cannot tell how much of a risk you’ll be and whether you are likely to repay their loan. Therefore, they would be inclined to turn you down should you need a loan. If you don’t want to take out any large loans, then repaying a credit card can be a good way to develop your credit score, without having to make any huge commitments.
How to improve your credit score
Once you have understood your credit score, you may want to take steps to improve it. One of the more obvious things to do would be to make your repayments in full and on time, if you make a conscious effort to do so, your score should steadily improve.
Without knowing, your credit score could be linked to another person, such as your marital partner. Their score could be having a negative impact on your score, so unlinking them to you can automatically improve your chances of getting a loan.
Being on the electoral roll can also help improve your score and your chances of getting a loan. Lenders can use it to confirm that you are who you say you are and check that any personal information such as your address is accurate.