Your credit score is the single most important factor in determining how likely you will be accepted for a loan and the amount of interest that you will pay back. The higher that your credit score is, the lower the interest payments will be on loans, mortgages and other financial products. In today’s modern society, the economy essentially runs on credit, so it’s a very good idea to try and maintain a good credit score throughout your lifetime.
A bad credit score can develop as a result of a whole different range of financial transactions. And, believe it or not, even those without any credit score at all can struggle to obtain credit when they need it. In this article, we are going to explore the different ways in which you can avoid developing a bad credit score and how to improve a bad credit score by using a bad credit loan.
Table of Contents
Credit Score Importance: Your credit score significantly impacts your loan eligibility and the interest rates you receive, making it essential to maintain a good score in a credit-driven economy.
Avoiding Bad Credit: Several factors can lead to bad credit, including not having a credit history, but one can safeguard and improve their score through strategies like bad credit loans.
Key Practices for Good Credit
- Timely Payments: Always pay bills in full and on time, as repayment history is a major factor in your credit score.
- Limit Credit Applications: Multiple credit card applications can negatively affect your score, and managing many cards can be challenging.
- Maintain Savings: A savings fund can help manage unexpected life changes, ensuring continued bill payments during tough times.
Debt Management: It’s crucial not to accrue more debt than you can handle, as excessive debt can impede your ability to make monthly repayments, further deteriorating your credit score. Recognize financial difficulties early and avoid using credit cards as a temporary fix.
Bad Credit Loans: These are designed for individuals with poor credit scores. While they can aid in improving your credit score, their effectiveness hinges on timely repayments and overall financial management.
Pay Your Bills In Full and On Time Each Month
We are going to start with the single most important thing you can do in order to avoid a bad credit score. And, that is paying all of your bills on time and in full each month. Your repayment history is the biggest factor that can affect your credit score. Even missing a single payment can have an adverse effect on your score and cause it to drop by a few points.
Limit The Number Of Credit Card Applications
Each time you apply for a credit card it adds a credit inquiry to your report. Credit enquiries make up 10% of your overall credit score. Apart from making lots of credit card inquiries, making these applications could result in having too many credit cards and lots of balances to keep up with.
Sometimes things can significantly change in life, which could make it hard to keep your credit score intact. This could include anything from a period of unemployment, the loss of a loved one, sickness or injury or divorce. When going through these changes, the last thing on your mind is your credit score. However, try not to worry about it too much as you can rebuild your bad credit score once you get yourself back on your feet.
One thing that would help should this situation ever arise, is by having a savings fund in place. It can help you make payments when disaster strikes or when you are going through times of emotional stress.
Never Take On More Debt Than You Can Handle
The amount of debt that you are in is the second biggest factor that can negatively affect your credit score. The amount of debt that you are in can also adversely affect your payment habits. Being in too much debt can often make it difficult to make your monthly repayments and as a consequence miss them which further damages your credit score.
Recognise When You’re Getting into Financial Difficulty
If you are starting to struggle and money is becoming pretty tight, then it’s important not to use credit cards as a solution. It’s a much better idea to reduce your spending and work harder to get yourself out of the situation. Even if it seems selling some of your personal items, taking on an additional job or trying to make money from a hobby.
Think Carefully Before Taking On Any New Expenses
Each new expense that you take on, whether it be changing your broadband provider, buying a new car or changing your mobile phone provider will affect your ability to manage your finances. When doing so, it is important to make sure that you can still make ends meet each month. Often, we add monthly bills to our outgoings without actually considering how it will affect our ability to pay all of our other monthly bills.
Improving Your Bad Credit Score with A Bad Credit Loan
A bad credit loan is exactly what it says on the tin. It’s a loan product that is designed for those with a bad credit score. Some bad credit lenders will run a credit check when you make an application, while others won’t run any check at all. However, do be aware that this type of loan is only going to improve your credit score if you are responsible with your repayments. Improving your credit score is still all down to you and about your ability to manage your finances and debt. Like any type of loan, the repayment process can take a long time and requires dedication.
How Your Credit Score is Calculated
In the UK, a credit score is calculated by Credit Reference Agencies (CRAs). The primary CRAs in the UK are Experian, Equifax, and TransUnion. Each of these agencies may have a slightly different scoring system based on the information they have about an individual. However, they generally consider similar factors when calculating a credit score:
One of the most significant factors is how timely and consistently you’ve repaid your past credit. Late or missed payments on loans, credit cards, mortgages, or any other credit agreements can have a negative impact on your score.
Level of Debt
This refers to how much money you owe in total across all your credit agreements. High levels of debt relative to your income can lower your score.
Length of Credit History
Lenders prefer individuals with a longer history of managing credit. If you’ve had credit accounts open for a long time and managed them well, it can be positive for your score.
This is the percentage of credit you’re using compared to your credit limit. For instance, if you have a credit card with a £1,000 limit and you’ve used £500, your utilisation is 50%. Generally, a lower percentage (using less of your available credit) is viewed more favourably.
Each time you apply for credit, it leaves a ‘hard search’ on your report. Multiple applications in a short time can indicate financial distress, potentially lowering your score.
Types of Credit
Lenders like to see a mix of credit types, such as credit cards, mortgages, and personal loans, as it suggests you can manage different forms of credit responsibly.
This includes any county court judgements (CCJs), bankruptcies, or Individual Voluntary Arrangements (IVAs). Such records can significantly harm your credit score.
Being registered on the electoral roll at your current address provides proof of address and stability, which is viewed positively by lenders.
If you have a joint account or a shared credit agreement with someone (like a spouse), their credit history can affect yours. If they have poor credit, it might impact your ability to get credit.
If you’ve been a victim of fraud or if there’s suspected fraudulent activity on your account, this can influence your credit score.
It’s important to note that while these factors contribute to your credit score, lenders might also have their own criteria when deciding whether to lend to you. It’s always a good idea to check your credit report regularly and correct any inaccuracies to ensure your score accurately reflects your financial behavior.