Your credit score follows you throughout your adult life so ensuring you do all you can to build it up is essential. You never know when you’ll need financial help, especially to deal with an emergency situation – but this is where short-term loans can be useful. Having a good credit score means you’re more likely to be approved for the amount of cash you need with flexible terms and low interest rates so you can deal with an unprecedented expense without having the added worry about how you’re going to pay for it. Knowing the factors that have an impact on your credit score is essential so you can avoid common mistakes. We’ll take a closer look at this below.
Why is your credit score so important?
There will come a time in your life when you need to take out a loan to get where you need to be, whether that’s to pay for an important life event, buy a house, or to deal with an emergency expense. But to benefit from the best interest rates, lenders will check your credit score to see how creditworthy you are which as a result, will determine whether your credit application is approved or rejected. Your credit score will generally be scored between 0-999, and the higher your credit score, the better. If your credit rating is high, the more likely you are to be approved for the financial help you’re looking for. If your score is low, the more likely your application is to be rejected by traditional lenders, like banks.
Common mistakes to avoid
There are a few ways in which you can keep your credit score healthy to show lenders that you can manage your money, and that you will be able to pay them back. Below, we’ll take a look at some of the most common mistakes borrowers make that can have an impact on their credit scores.
Late payments
Payment history is one of the most important factors that credit bureaus take into account when calculating your credit score, which is why it’s essential to make sure you pay your outstanding loans on time. Keeping up with monthly loan payments – paying on time and in full – can actually have a positive impact on your credit score, showing lenders that you are a trustworthy borrower. However, missing repayments can have a significantly damaging effect. This will then be reflected in your credit score and show on your credit report, influencing your lender’s decisions when you apply for finance in the future, and making it more likely that you’ll have to pay higher interest rates and approval may become more difficult.
Applying for too much credit
Another common mistake that you may not realise affects your credit score is applying for credit with a range of lenders at the same time. When you apply for finance, many lenders will carry out a hard search inquiry which will show up on your credit report. Applying for credit with a range of lenders shows that you are desperate for cash, and therefore may not be in a situation to make repayments on time. By triggering hard inquiries from a range of lenders, you’re likely to see your credit score deplete.
Closing old accounts
You might think that closing old accounts that you don’t use anymore is just a way of organising your finances. But this can also have a detrimental effect on your credit score. Closing your old accounts means that credit bureaus will have less information to base your credit score on, and reduces the length of your credit history. Leaving old accounts open means lenders will be able to see you’ve been a reliable borrower in the past, standing you in a better position when it comes to being successful with future loan applications.
