Let’s start with some common terms related to Credit Score such as what it is, why is it important and what is considered to be a good credit score in the UK.
What is a Credit Score?
A credit score is an indicator that lenders such as banks will use as a reference to determine if you can pay your loan amount due on time. This gives financial institutions like banks a reasonable level of confidence that you will not default on your loan.
A credit score is like your track record with earlier payments. Banks who loan money to you get an estimate of how creditworthy you are and whether or not you will repay the loan amount. A credit score is generally a number that ranges between 1 and 999.
What is a Credit Check?
If you have a good credit score in the UK, you can approach banks for a loan. At this time, the bank will assess if you are worthy of being approved for the loan. Banks do this to check if your finances are stable and to be sure that you can pay for such a loan. The Credit Check report will list details such as whether you have a mortgage, how much you owe on credit cards and if you have missed any payments so far.
What is a Good Credit Score in the UK?
A good credit score in the UK should be above 700. If you have a good credit score, you can save yourself a lot of money on interest rates. This is due to the fact that the on-time payments can give banks the confidence that you will repay the sum on time or at the very least repay the loan in fixed, regular instalments.
If you have a less than average credit score or credit rating, you will be given a small loan amount at a high-interest rate. Should your score is quite bad, some banks will even refuse to provide you with a loan. If you really need a loan, you may be required to pledge some collateral as security for the bank in case you default on the loan payments. This collateral can be anything valuable that the bank can sell in an auction to recover the money you owe.
What are the Benefits of a Good Credit Score?
Paying your credit card bills in a consistent manner is seen by banks as a good sign. As they will gauge you as a reliable debtor and will lead to them offering you with better interest rates. The main benefits of having a good credit score in the UK are as listed below.
Low-interest rates on Credit Cards and Loans
A small change in the interest rate on a long term loan can have a significant influence on the cost of the loan. Similarly, having a high credit score can get you a cheaper loan with a low interest rate.
Better Chances for Credit Card and Loan Approval
Having a good credit score in the UK makes it easier for you to avail credit cards and loans. This doesn’t always mean that you will be guaranteed money but it offers you a higher chance in case the need arises.
More Negotiating power
When you have a good credit score, the chances of you defaulting on a loan are slim which gives banks a greater assurance. Based on your credit score, many competing banks will give you an offer. These offers will tend to be shallow interest ones to secure your debt.
Getting Higher Limits
The loan amount you get is based on your income and credit score. One of the benefits of having a good credit score is that banks are more willing to let you borrow large amounts of money once you have shown that you can pay back the borrowed amount on time. If you have a poor credit score, you may still be approved for a loan, but it will be limited.
Easier Approval for Renting Houses and Apartments
Many landlords use credit scores to determine the trustworthiness of their tenants. A credit score in the UK that is affected by poor financial records or through unstable sources of income (unemployment between jobs) can severely affect your chances of securing a loan.
How can I improve my Credit Score in the UK?
If you default on a loan, it doesn’t mean that your account is now blacklisted or banned from credit. Your credit rating can take a hit but you will need to improve your rating based on the following.
Register on the electoral roll
Registering on the electoral roll is the easiest ways to get credit. It tells the government that you are a reliable citizen worthy of credit.
Demonstrate financial responsibility
Don’t spend money that you don’t have, try to live within your means. Manage your payments well and don’t miss any of the deadlines.
Close down old and unused accounts
If you have accounts with a small amount of money in banks that you no longer visit, it would benefit you to close these unused accounts.
Cut financial links with old partners
Having combined financial statements makes the person a subject of scrutiny for the credit company. Ask all three Credit Rating Agencies to add ‘notice of disassociation’ to your file to sever ties with an ex-partner.
Get a credit card
Do this only if you are capable of clearing credit card debts regularly. As regular payment of your credit card bill will definitely improve your credit score in the UK.
What are the Causes that Downgrade your Credit Score?
Listed below are a few of the reasons that have a negative impact on your credit score in the UK.
Late Payments are seen as a red flag, it shows that you are struggling to keep up with your expenditures. This puts your lenders on alert.
If you go bankrupt, your credit score will undoubtedly take a significant beating and result in a low credit score.
No financial history
If you’ve never borrowed money or have never held a job before, banks will perceive you as a candidate with no financial history. Banks tend to be wary of these people because there is no prior financial record.
Applying for credit regularly
If you keep on going to a bank for a loan, then your credit score will be in trouble. Doing this tells the bank that you are in regular need of cash and that a financial crisis is almost imminent.