As you navigate through life, your credit score will be mentioned time and again. Most people understand the basics of a credit score and know that there’s such a thing as good credit and bad credit, but it might not go further than that. But your credit score has a huge impact on the financial side of your life, and good credit can potentially save you a lot of money.
This post will explore what a credit score actually is, as well as how you can check your score and improve your credit.
What is a Credit Score?
Credit scores are created by credit reference agencies, like TransUnion, Experian, and Equifax. They’re essentially a numerical value that demonstrates how well you manage your finances. As a general rule, the higher your score, the better your credit rating.
The credit reference agencies collect information about you from a variety of sources, including lenders, public records, and service providers like utilities and mobile phone providers. They then use this information to come up with a credit score.
Basically, this score indicates how likely you are to repay any loans or debts.
The different credit reference agencies might have different methods of compiling your score, so it can be worth checking what your score is for each agency. Your score also isn’t set in stone, but changes over time.
How Can I Check My Score?
It’s difficult to improve your score without knowing what it actually is or what it means. You can check your score for free by going to a credit reference agency website and putting in your details. They’ll show you your score.
You can sometimes get more insights into your score, such as why it’s at a certain point and how you can improve it. This can be free, along with the score itself, or as a paid service.
Most credit reference agencies offer a free month’s trial to their premium services. If you want to focus on your credit score, you can use this to get a deeper insight into your score, as well as tips to improve it, and then cancel the service after the trial.
How Does My Score Affect My Life?
Your score can have a significant impact on your life, especially if you need to take out loans, credit cards, or want to make a large purchase.
Generally speaking, a higher credit score means that you’ll be able to borrow more money, and you might get a better deal on your interest rate. This is because you’re seen as a more trustworthy borrower, and lenders are more sure that they will get their money back.
For example, if you want to buy a house, the mortgage provider will check your credit score. Depending on the score, you might be able to get a more expensive mortgage, so you have more options for houses. You might also be able to get a much more generous interest rate, so you’ll pay less in the long run.
A low credit score can make it impossible to take out certain loans, which can make improving your financial situation feel like an uphill battle.
When Will My Credit Score Be Checked?
Your credit scores get checked with every credit application or loan. This includes applying for a credit card, applying for a loan, applying for a mortgage, or trying to rent a house.
There are two types of credit checks, a soft check and a hard check. A soft check gives the lender a general idea of your creditworthiness, and some loans in principle, or certain credit cards can do a soft check to guarantee that the application will be successful.
A hard check gives more details about your credit score. You will always be warned if an application requires a hard check. This is because a hard check can temporarily lower your credit score. Repeated hard checks, such as if you keep applying for loans or credit cards in a short period of time, can make the score drastically worse.
What Can Negatively Affect My Score?
There are a lot of things that can hurt your credit score.
In general, risky spending and borrowing habits reflect on your credit. If you miss debt repayments or regular bill payments, it will be bad for your credit score. If you get a lot of checks within a few months, it will hurt your credit as well.
Even a limited credit history can be bad for your credit score, because lenders don’t know whether you’re trustworthy or not.
Sometimes, your credit score can be negatively affected by credit check errors. This is frustrating because it’s not your fault, but it’s because of the credit reference agency, such as TransUnion. The good news is that you can file a TransUnion dispute and actually win, so if an error like this impacts your credit, you can get it fixed.
How Can I Improve My Credit Score?
A bad credit score might seem like the end of the world, but the good news is that it changes both ways. You can build your credit score and see real changes within a year.
Some improvements can lower your score to start with. For example, if you don’t have a credit history, getting a credit-building card can be a good way to prove that you can borrow money, as long as you pay it off in full each month. Keep your borrowing low as well, as cards where you use less than 20% of your credit limit will be more helpful to your score.
The best way to improve your credit score is to eliminate debts where you can. Even making regular payments that are above the minimum payment can start to improve your credit, and paying off a debt completely will really help your score and your finances as a whole.
Simply put, responsible spending and borrowing will build your credit score over time.
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