Many people will be emerging out of 2020 with a low credit score, after a financially challenging year. Whether you have missed repayments, accumulated a large amount of debt, or struggled with making ends meet, your credit score may well reflect the year you’ve had and the financial strain your household has been put under.
The good thing about credit scores is they are flexible – they adapt with time and tell a picture about your ‘financial health.’ This means that you do have control over it, and can change it. Perhaps you are hoping to buy a house or new car in 2021 but are worried about how your low credit score will impact your chances of obtaining this.
Don’t worry – you still have time in 2021 to improve the score and get your lender on side. It can take several months to change your credit score so you might want to factor this into your plans for the year. But, it is achievable and when you know the techniques, you can improve your score in just 6 months.
Firstly, why does a credit score matter? As previously mentioned, a credit score is a financial picture of how you spend and use money. Investopedia defines it well, “The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner.” So, everyone has their own personal credit score and lenders will look at this to decide whether they think you should receive the credit you want. When you apply for a loan, they will look at your score – it will be a number. The higher the number, the better you seem to them, or the more reliable you may appear. They may trust you to repay their money to them if you have a high score, but doubt whether you could manage it if you have a low score.
Online lender Wonga (a company that uses credit scores to determine lending eligibility) have published online guidelines for improving your credit score. These are entirely achievable and we’ve included some of these below for convenience:
- Paying your bills on time – this includes mortgages, rent, utilities, phone bills and so on. By paying bills on time, your score stays stable and won’t dip. Creditors like to see this so they know you will repay them if they were to loan you money.
- Paying the full amount that is owed each month on your account – this includes your credit card and any loan payments. Make sure you meet minimum repayments or more if you can. One missed payment and your score could quickly lower!
- Try not to use more than 30% of your existing credit facilities – you can create a spreadsheet that you use to see how your outgoings compare to your incomings. Use this regularly and update it when things change. It helps you get an accurate picture of your money.
You will want to sign up to a credit checking agency (this can often be free or very low cost) so you can check how your credit score has been impacted at the end of each month. Don’t expect miracles right away but over time, with correct money use and paying all your debts on time etc., you can alter it so the score more accurately reflects how you have used your money. You can then go ahead and apply for your loan with a higher chance it will be accepted. This is useful, because each time a credit company rejects your application, this leaves a further mark on your file, and lowers your score. So, you really don’t want to be applying for a loan if you do think there is a risk of it being rejected.