Credit Score
Personal Finance

Understanding Your Credit Score

One of the necessities of modern life is having a good credit score. Credit scores are used to secure mortgages, car loans and credit cards. The interest rate that you are charged will often depend upon your credit score as well.  Landlords, insurance agencies and even some employers will also check credit reports.

Many misunderstand how credit scores are determined. This seems to be especially true with young adults who are under the incorrect impression that paying cash and having no debt will result in a good credit score.

While the way that credit scores are determined is a bit of an arcane art, there are some simple ways to understand, build, monitor and improve your credit score.

The Basics of a Credit Score

Basically your credit score is a reflection of several factors. The amount of money you earn in comparison to how much you owe and how reliable you are in paying your debts.  Credit reporting agencies consider your payment history to your creditors, including utilities, your employment history, how long you have lived in your current residence, and even whether or not you are on the electoral register.

Items which Negatively impact your Credit Score

  • High levels of existing debt.
  • Missed or late payments. This can include credit cards, rent, and utilities.
  • Making a large number of credit applications.
  • Open but unused credit accounts.
  • Being part of a joint account. If the other person on the joint account does not pay a bill on time or has bad credit, it will reflect on you.
  • Mistakes on your credit report.
  • Moving too often. Creditors like stability.
  • Not being on the electoral register.

How to Improve your Credit Score

  • Pay all of your bills on time.
  • Check for errors. You can obtain a copy of your credit report for £2. If you see an error, contact the reporting agency and dispute the error. They have 28 days to verify the information or must remove it from your report.
  • Close any unused credit accounts.
  • If there were special circumstances that hindered your ability to pay your bills but are no longer an issue; such as losing your job but now having a new one, you can place a “notice of correction” on your credit report.

If you basically have no credit history, talk with your bank about obtaining a credit card or apply for one of the credit-building credit cards.  Your interest is probably going to be high so spend only what you can afford to pay off each month.

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