Your credit score plays an incredibly important role throughout your life. From time to time, you might have to approach a lender or apply for a credit card, and the first thing that they are going to look at is your credit score. Your credit score determines just how risky you are to a particular lender or a creditor.
Remember, when you approach a lender or a creditor, they don't know you personally. More importantly, they don't want to take the time to know you personally either; they just want to see your history and determine whether you are a suitable choice or not. In the UK, credit scores typically range from 0-999 depending on which bureau you're checking (Experian, Equifax, or TransUnion).
Scores above 880 are classified as "excellent credit." However, if your score falls below 500, it indicates a tendency to be bad with money. If you have taken a loan and have been unable to pay it back on time, your credit score is going to take a hit. Ultimately, it all reflects on your scores.
Now, if you have made some bad decisions in your past or have fallen on hard times, which has resulted in your credit score taking a hit, you should know that there are ways to improve it. If your credit score is poor, lenders won't give you money. It's a vicious cycle at the end of the day. But you should know that you can break out of it. There are a number of strategies that you can use to improve your credit ratings and get the maximum score.
Always Pay Your Bills in a Timely Manner
This isn't a trick or a strategy; it's just a simple instruction. Without this, nothing else will work. If you want to improve your credit score, you need to make sure that you pay your bills on time. Payment history is one of the first categories that a potential lender is going to look at when determining whether to give you the loan or not.
Credit reporting agencies tend to look very closely at your history, and it accounts for a significant portion of your credit score ranking. Needless to say, you need to make sure that you clear your bills on time. If payments are delayed, even by a few days, it could have a dire impact on your credit score.
The best thing to do is set reminders for different bills, especially if you have several outstanding amounts. You will know the deadlines and will be able to make the payments on time. Or, you can use the old-fashioned method of writing down the amounts owed on a calendar. There are a bunch of smartphone apps that you can use as well to manage your bills and make sure that all payments are cleared on time.
Always Pay More Than the Minimum Amount Due
One of the most important things that you can do to reduce your balances quickly and get an improved credit score is to pay more than the minimum amount due each month. If you continue paying off the minimum monthly amount due, it's going to be difficult for you to clear the total amount.
You will realise that your debt load will decrease slower, and the months will pass by. For example, if you have more than one balance to pay off, like multiple credit cards, you might want to think about making a substantially larger payment on one balance, and the minimum on another. After all, you only have a limited amount that you can set aside and pay off each month.
As you do that, your balances are going to go down much faster, and you will end up clearing one balance. Once you do that, you can then turn your focus on another balance. It's one of the best ways to clear your debts as quickly as possible.
Pay Off Debt Instead of Moving It Around
Another major factor that plays an important role in your credit ratings is the amount of money that you owe, as compared to the amount of credit that was made available to you. The available credit to you is also regarded as the open credit utilisation rate.
Obviously, it's best if you aren't near and definitely not over the limit available on each of your credit cards or extended credit lines. The utilisation ratio is often scrutinised very closely by borrowers and lenders. For instance, if a borrower has a higher utilisation rate, they are considerably less likely to pay off the amount that they have borrowed. Ultimately, this impacts their decision to lend the money or not.
Let's put this into an example for a better understanding: Mr. X has a credit card with a limit of £10,000 on it. If his balance on the card is £2,000 instead of £8,000, it's better for him. He's got £8,000 credit still available to him instead of £2,000. The lower balance will ultimately contribute to a higher credit rating for Mr. X.
More importantly, you should know that the type of account also plays a role. It is better if you owe £50,000 on a mortgage, since that is serious, as compared to £50,000 on a credit card.
Review Your Credit Report Carefully
When was the last time you took a close, hard look at your credit report? You need to make sure that your credit report is up to the mark and has been updated. It's one of the simplest, yet the most effective things that you can do to boost your credit score.
There are a bunch of online services that offer credit monitoring services, so you can always request your credit report through these agencies. However, you need to make sure that you only choose services that you require, as many credit monitoring agencies might try to lure you into paying for services that you might not even need.
Go through your report as extensively as possible, and determine whether it is up to date. If not, you can always request that certain things be removed or amended from your report, which will also impact your credit score.
Bring Down Your Debt to Income Ratio
One of the things that you need to take a look at is your debt to income ratio. This is a comparison of your monthly debt to your monthly income. If your monthly income is high and your monthly debt is relatively low, lenders will have more confidence in giving you money, and ultimately, this is going to impact your credit score.
A higher debt income ratio, on the other hand, has a negative impact on your credit ratings, as it makes lenders more cautious about lending money. You might want to work on cutting down your debt or focus on increasing your income if you want to bring down your debt to income ratio. This is ultimately going to have a good impact on your credit ratings in the long run.
Maintain a Healthy Mixture of Debt
Do you only owe money on credit cards? A balanced mix of debt will improve your credit ratings, so it's best to diversify your debt instead of keeping all your eggs in one basket. Remember, there are a host of different loan products being offered by banks and it's a wise move to get one of those if you need money.
Research done by credit agencies shows that customers who have a good mixture of debt are usually less risky when compared with those who only have experience with a single credit product. If you have £100,000 in total debt, it's better if the debt is divided between mortgage balances, loans, or even credit card debt, as compared to a full £100,000 in credit card loans.
Another thing that you need to keep in mind is that you must always keep your credit cards active, even if you don't use them. This is going to have an impact on your credit scores and it will show that you have a higher credit utilisation rate and it's only going to paint a good picture of your credit history.
The Road to Excellent Credit
Achieving an excellent credit score doesn't happen overnight, but with these proven strategies, you can systematically improve your creditworthiness and reach that maximum score. Stay disciplined, monitor your progress, and remember that every positive financial decision brings you closer to excellent credit.
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