We’re in a very unstable time when it comes to money. Daily costs are rising, economies are shaky, and people are still pulling themselves up by their bootstraps. It’s not something that can be done overnight, and will take work, but we’re getting there.
Meanwhile, closer to home, more of us are having to take a look at our finances. Part of that is looking at our credit scores. Keeping a good credit score is important to keeping your options open in the future. A lot of future buys will rely on a good credit score, so keeping it at a decent level is important.
If you’re worried about your credit score, take a look at our guide. We break down all the things that a credit score can affect, plus what can have a good or bad effect on your credit score. With that knowledge, you can make moves to improve your credit score and be in a better position to make big buys in the future.
Why do you need a good credit score?
A good credit score will affect a range of financial decisions. It’s seen as a sum up of your financial history and will therefore inform whether you are a reliable person to loan to.
For one thing, you will receive big savings on interest rates on loans. If you find yourself looking into a hard inquiry loan, you can enjoy lower interest rates and more enjoyable monthly repayments.
Alongside that, you will gain better terms on your loans and better availability. There is a credit score ceiling to reaching certain advantages with your loan, like credit card products, higher dollar limits, etc. If you have a higher credit score you will find it easier to shop around for better rates and terms.
You will also have access to the best credit cards, offering the most rewards and the lowest interest rates, due to the lessened risk of lending to someone with a high credit score. And if you are looking for insurance, you will see your monthly rate be far more affordable due to discounts.
Crucially, for most people thinking of the future, a good credit score can affect your mortgage borrowing power. With a decent credit score, you will be able to borrow more money from the bank, as you will be seen as less of a risk. And the higher your chances are of getting approved.
So, there are a lot of things that can be affected by your credit score, so let’s take a look at what can affect your credit score, so that you can make moves to improve it.
What can affect your credit score?
The most important factor in determining your credit score is your payment history. FICO Score is used by 90% of top lenders, and your payment history will account for 35% of your payment history.
Lenders rely on your credit score to tell them that you can pay your loans on time, so even one missed payment can have a negative impact on your credit score.
A factor that can really help you is your credit mix. The highest of credit scorers get there by diversifying their loans. This can be amongst car loans, credit cards, student loans, mortgages, and other credit products. Mixing your credit options proves to lenders that you can handle your finances well amongst a wide range of credit products.
That being said, too many new accounts will lower your credit score, so don’t go opening credit products for the sake of your credit score. They can indicate an increased risk to the lender.
The type of accounts you open are also important to your credit score. Two types of debt are contained in credit: installment loans and revolving credit. You will want a mix of the two for a good credit score.
Installment credit loans, wherein you borrow a fixed amount and repay it in monthly installments, usually cover student loans, personal loans, and mortgages. Revolving credit is usually associated with credit cards but also covers some home equity loans and see you covering a minimum monthly repayment amount based on how much credit you use.
Another important aspect is your amount owed. Your credit score will go up as your debt goes down. Your credit utilization ratio accounts for 30% of your FICO Score and is determined by dividing the total revolving credit you are using by the total of your revolving credit limits, giving you a ratio that tells lenders how reliable you are at keeping up with your repayments.
Your credit history length is also a factor. This includes your oldest credit account, the age of your newest credit account and the average age of the rest. For the most part, the longer your credit history the better your credit scores will be, as it proves that your repayments have been consistently repaid.
What can be done?
All is not lost if you find you have an unsatisfactory credit score. If you’re looking to improve your credit score, there are things you can do to improve your financial options.
Initially, you should take a look at your current credit score with the Experian app or by looking at other credit score companies online. This will allow you to know where you currently stand and give you a foundation to build from.
The most important thing is to keep on top of your payment history. Make sure you are paying all your existing loans and debts on time. Even one missed payment can have an affect on your credit score.
Keep your credit utilization under 30% to stay safe, but to get your credit score higher, keep it under 10%.
The number of accounts you have open is an important factor that will lower your credit score the more you open, but if you’re in a good position where you only have a couple of accounts or loans to pay back, it might be beneficial to open another one and diversify your payments.
Take a look at your finances, and if you are really struggling, contact your bank for some financial advice on how to move forward.