How important is Your Credit Rating?

When it comes to your finances, there’s one number you need to continually keep score. It’s your credit score, of course, not your grades in school or your phone number. This one important number you can’t ignore unless you want your finances to go haywire. Before that happens, which plenty of consumers in the UK have to deal with, here are some reasons to convince why your credit score is more important than your bank account or GPA or any number for that matter:

1. Your credit score determines cost of future purchases.

When your credit score is good, you’ll be able to enjoy advantages such as lower interest rates on loan products and better deals on your insurance. Conversely, a poor credit rating means your future purchases will be more expensive.

2. Your credit score takes times to build.

If you’re a fresh graduate with little to no credit history, you’ll have to start from the bottom in order to have a good credit score. You’ll have to open new accounts such as credit cards and you’ll have to prove to credit agencies and financial firms that you have what it takes to be a responsible consumer. This may take months or even years to do that.

3. But your credit score takes even longer time to rebuild.

If building a credit score from scratch takes time, rebuilding it because you bungled up yours with late payments, massive debt and financial mistakes takes even longer time. You’ll need years, a ton of handwork and complete commitment to improving your credit scores in order for it to work. Rather than go through the complications and consequences of a bad credit score, might as well make sure your score always stays on the good side of things.

4. Your credit score can affect where you live.

Whether you’re renting or buying a home, your credit score plays an important role in this basic and major need. A poor credit score, for example, can affect your rental choices. Landlords, after all, want tenants with a reliable payment history. If you’re looking for a mortgage loan, it will be harder to find a deal where you’ll get approve for. If you do find a suitable mortgage loan, expect for your interest rates to be more expensive than customers with good credit.



Things You Need to Know About Your Credit Rating

If you’ve ever been refused a personal loan or a mobile phone contract citing your credit rating as the reason for the refusal then you know by now how important the financial concept is. Whether you like it or not, you need to do what you have to do to keep your credit rating fair, good or even on the excellent side of things. Otherwise, you’ll end facing consequences such as loan rejections, high interest rates and more inconveniences than necessary.

To get you started on the right foot, here is a list of things you need to know about your credit rating:

There’s no such thing as a universal credit rating.

Contrary to popular belief, you don’t have a universal credit rating. There’s no such as thing as credit blacklists either. If you got rejected from one lender, it doesn’t mean you’ll get rejected from every other lender. Remember that lenders use different criteria to score you. While it may be harder to find a personal loan when your credit rating is poor, you’ll find that there are actually firms willing to lend you money. The trick really at the end of the day is to find the right lender.

Credit rating is not just about your capability to pay.

When lenders check your credit rating, they’re not only doing it to determine your financial capability. But more, they’re doing it to predict your future behavior as consumer and borrower. If you’ve been a good payer but missed a step because of unemployment as indicated on your credit files, for example, then you’ll have higher chances to get approved if you found a job now. Your credit history, in this case, matters. If you have little to no credit history then you have a lot of work ahead of you.

Credit rating is more about how much lenders will earn.

If you have a perfect credit score, you might think that you’ll get approved for a loan in a blink of an eye. Sadly, that’s not always the case. At the end of the day, financial firms are all about making money out of customers. They can make the most money from customers with a credit score that’s not always perfect. If you’re always repaying your credit cards in full and your bills on time, you can still get a rejection. The reality sucks, we know, but that’s how it is in the leading market.

Credit rating affects the rates you’ll get.

If you have a poor credit rating and you need a loan you’re financially capable to handle, you’ll get approved for the loan but there’s a catch. Your interest rates may be higher than if you have a stellar credit rating. Lenders, nowadays, check customer credit files for the purpose of determining how much risk you pose. The higher the risks, the higher the interest rates they’ll charge your loan. And this rate to risk factor is especially manifested on the representative rates you’ll be offered on your personal loans.

Credit scoring can affect you in more ways than one.

Your credit score may just be a number but it can affect major areas of your finances if you’re not careful. As much as possible, it’s best to maintain a good credit score. Otherwise, you’ll be putting financial areas such as your mortgages, credit cards, personal loans, utility bills, insurance and even your mobile phone contracts at risk. You’ll not always get a rejection but you can expect to get more expensive rates if you have a poor credit rating.



Hand putting check mark with green marker on excellent credit score evaluation form.

Understanding How Credit Rating Works

Do you know that you’ll be paying more in interest if you have a bad credit score? Do you also know that it’s often difficult to find a suitable personal loan if your credit rating is less than perfect? Such are the consequences if you’re not deliberately careful with keeping your score on the good end of things. Your credit score may just be a number at the end of the day but it can wreak havoc on your finances.

You don’t want to wait until it’s time for you to purchase a car or house before you take time to understand how credit rating works. In fact, there’s no better time to know more about the matter than now. And to help you do just that, here’s your quick guide to credit rating:

What is a credit rating?

Your credit rating is determined by a credit-scoring company based on information and data from major credit-reporting agencies in the UK. To represent your credit rating, you are given a credit score, which can fall within different categories – bad, fair, good and excellent. Your credit score will depend on the scale used. If your score is calculated using the FICO scale then getting a score of 700 to 850 is good while a score of 300 means you’re work is cut out for you.


How is your credit score calculated?

If we’re sticking with the FICO scale then your credit score is calculated based on five key elements, which are:

  • Payment history – One of the first things credit agencies look at when computing your score is your payment history. It’s also the first thing your lender looks at to determine your creditworthiness. Payment history is 35% of your credit and it’s also the most critical aspect you need to focus on if you’re in the process of boosting your score.
  • Amounts owed – The total amount of debt you owe including personal loans, credit cards and more is another key element that affects your credit score. This element is 30% of your credit score.
  • Length of credit history – The longer your credit history, the better your credit score will be. At least that’s how it works in general. If you’ve been using credit cards for long, for example, and you’re a good payer that translates to positive effects on your credit score. Credit history is 15% of your credit score.
  • Credit mix – When calculating your credit score, the mix or diversity of your credit accounts is also considered. Though just a small 10% of your score, it would help if you have a diverse mix of retail accounts, credit cards, installment loans and more.
  • New credit – Finally, if you have new credit accounts that’s 10% of your credit score. If you’re planning to open several new accounts in a short period of time, you might want to rethink your decision. Having new accounts in just a short time pose greater risks on your credit score in general.



How does your credit score affect you financially?

Let’s say you’re applying for a personal loan. Your lender will look at your credit rating or your credit score not to determine your ability to pay but how much risk you pose as borrower. Even if you have sufficient income and your outstanding balance is minimal, your lender may think twice lending you money if your track record is unimpressive. If your payment history, for example, is really bad, then you’ll either get a rejection or your personal loan will come attached with a heftier interest rate than if you have an excellent credit rating.