Your credit score is your financial footprint, and it pays to stay on top of your scores. Depending on the strength of your credit score, you will have access to different financial products and services such as mortgages, credit cards, and loans.
Understanding your score gives you a sneak preview of how companies view your creditworthiness. The higher your score, the lesser of a risk you are to lenders. Furthermore, it is your legal right to get a free credit report that details your financial profile.
What Is a Fair Credit Score?
In the UK, there are three main credit rating agencies (CRA) – Experian, Equifax, and TransUnion. These agencies score individuals based on 5 categories which are:
- Very Poor
The scores vary per CRA as they use different numerical scales, but their interpretation is the same. Most often than not, individuals fall into one category or class with all CRAs as the same financial history is used across to give you the ratings.
The largest CRA in the UK, Experian, has scores that range from 0 to 999. A fair score with Experian ranges from 721 to 880.
Equifax uses a scale of 0 to 700 with a fare score ranging from 380 to 419.
TransUnion has a fair score ranging from 566 to 603 on a scale of 0 to 710.
What a Fair Score Means for You
When you are looking for credit or applying for a loan, a higher credit score can save you money. When your score is rated as fair, lenders see you as a subprime borrower which means that the terms you are going to get for your credit facility will not be as favourable as someone with a good or excellent score.
In case you qualify for a loan, the interest rates charged will be higher. If the odds go against you, your application could even be rejected.
As you build your credit score moving from fair to good to excellent, your chances of qualifying for credit on favourable terms increases. In short, having a higher credit score helps improve your financial circumstances. Here are some benefits to expect with a higher credit score.
Lower Interest Rates: Higher credit scores come in handy when taking out loans as they help you qualify for a lower cost of credit. This applies across the board whether you are looking for a mortgage, auto loan, personal loan, or student loan.
Lower Monthly Payments: The monthly payments you make on loans comprise interest and principal. While the loan principal is constant, the interest component will significantly come down due to competitive rates thus giving you lower monthly instalments.
Attractive Credit Card Rewards: A higher credit score opens opportunities for better credit card deals and rewards such as 0% APRs, much higher cashback percentages and credit limits.
Factors That Lower Your Credit Score
Depending on the structure and composition of the credit scoring model used, certain factors affect your credit score. Understanding these factors can help improve your score.
Here are the main factors that affect your score.
- Late Payments – Paying bills such as credit cards payments, utility bills and loans after the due date affects your credit rating.
- High Credit Utilisation Rate – If the ratio of the money you owe compared to the total credit made available to you is high, lenders will see you as a credit risk.
- Poor Payment History – If you have been inconsistent with your payments, always crossing the due date, credit reference agencies will pick those payments thus bringing down your credit rating.
- Credit Mix – How long you have had credit and the different mixes of credit accounts such as car loans, mortgages and credit cards will determine whether you are responsible enough to service additional debt or not.
- Credit Enquiries – Making many credit applications in a short period shows that you are in a financial crisis, and this will affect your rating. Lenders normally make hard or soft checks before approving your credit facility. However, some unsecured loans do not necessitate hard enquiries. It may be worth looking out for them.
- Negative Public Records – If you have been involved in court cases and civil judgement or filed for bankruptcy at one point or the other, your credit rating will take a hit.
- Total Outstanding Debt – The total amount of the debt you have across your different accounts is normally factored in and weighted when assessing your credit status.
What You Can Do to Improve Your Credit Scores
Looking at the benefits of a higher credit score, you must begin working on your credit status. Repairing your credit score is much less like throwing your car into reverse. Youn must identify what worsened your status and do the opposite. The improvement may not be seen overnight but with time your scores will pick up and you will begin enjoying favourable access to credit. Here are the things to do beginning immediately.
Pay Your Bills
Working on improving your payment history will boost your credit status significantly. This is because many credit scoring models assign a higher percentage to the timely payment of bills in determining your credit score. Ensure you pay your bills on time and in full as agreed with the lender.
Manage Your Credit Utilisation
There are two ways you can manage your credit utilisation ratio – increasing your limits or lowering your credit consumption. If possible, your utilisation rate should not exceed 30 per cent of the available credit.
Check for Errors
Make it a habit to request your credit reports from all the 3 main CRAs and go through them as you check for errors. In case you see any inconsistencies, raise a dispute with the CRA and have the error rectified.
Space Out Your Credit Applications
Instead of applying for credit from different sources within a short span, plan your credit applications and stretch them out. Only apply for credit if you must, to avoid many hard enquiries appearing on your credit file.
Your credit score serves as a barometer showing how well you are doing financially. While a fair credit score is a step in the right direction, you should aim for a good or excellent score. If you want to get credit on favourable terms, you must take note of the factors that lower your credit status and work towards repairing your score.