Your credit score is a key component in your financial life. It can affect your ability to get loans, mortgages, car finance, credit cards, and more. Before being approved for financial products, lenders will usually check your credit score. A low credit score is off putting because your past behaviour may indicate you can’t be trusted to handle future finance. If you’re worried about the impact of bad credit, follow our top tips to avoid a low credit rating.
What is bad credit?
Your credit report is like an online financial CV. It lists all your history when it comes to credit and borrowing money. Your credit score is calculated by the information on your report and shows whether you can handle credit responsibly or not. A low credit score can affect your car finance eligibility, the likelihood of being approved for a mortgage, the interest rate you could be offered on a credit card and much more. You may find yourself with a bad credit score if you have a history of not paying back your finance, no previous credit history or you have high levels of debt.
How do you avoid a bad credit score?
If you’re just starting out in your credit journey, follow our top tips below on how to avoid bad credit and the factors which affect your credit rating.
Make payments on time and in full.
One of the biggest influences on your credit report is your ability to make payments on time. Credit scores are all about future predictions so sticking to the rules of your credit agreements and making payments on time can help to better your score. It shows future lenders you’re less likely to default on your loans.
Use credit little and often.
People often think using credit is a bad thing. However, using credit correctly can help your credit score to grow. Your credit utilisation ration is calculated by how much available credit you have and how much you’re using. Good credit management means keeping within your finance budget and only using around 30% of your credit limit at a time. This helps you to stay on track and keep your credit at an attainable level.
Get credit for the first time.
Did you know you can have bad credit due to no credit history? A lack of borrowing history means lenders won’t be able to predict how you’ll handle credit. When applying for credit for the first time, you’re probably not going to get approved for a £50k car loan as the risk to the lender would be high. Instead, you should start building small amounts of credit such as making small payments on a credit card and paying them off in full or getting a mobile phone contract in your name.
Pay more than the minimum on credit cards.
When you spend money on a credit card, you will be required to make a monthly payment towards paying of the balance. You will be given a minimum payment amount you will need to pay each month. If possible, you should always strive to pay more than the minimum payment as it can harm your credit score. Only paying the minimum amount can indicate to lenders that you’re struggling to pay back your credit.
Reduce how often you appl y for credit.
When you apply for credit, a lender may perform a credit check on you. Whilst it can be a good idea to hunt around for the best deal, applying with multiple lenders in a short space of time can be detrimental to your credit score. To protect your score, you should only apply with one or two lenders are once or get a pre-approval where only a soft search credit check is performed. Lots of hard search credit checks on your credit report at one can indicate to lenders that you are desperate for credit and are being refused by lenders.