A bad credit score is like a nasty smell that follows you around wherever you go. It’s not something you can just ignore, as it will turn up in some of the most critical moments of your life. Your credit rating affects you when you apply for a job, find a new place to live, take out a loan, or buy a car. It won’t go away by merely tucking it under the carpet and pretending it doesn’t exist. It is a problem that you need to deal with as soon as possible.
So what is a credit score? Simply put, it is a number that indicates how trustworthy you are. It tells banks and lenders how likely you are to be able to repay a loan, predicting your future behavior based on how you have acted in the past. Your credit rating takes into account your credit history, debts, and missed payments, so the more financially sensible you are, the better score you will have. If you have a history of overspending on your credit card, missing payments, and are currently in vast amounts of debt, your credit score will be low.
There is no universal credit score for any one person, as different lenders use different systems and standards to score applicants. Each lender will usually have a minimum threshold you need to hit in order to meet their criteria to be eligible for the credit you’re applying for. This means that if your credit score is slightly too low for one lender to accept, you might still have luck elsewhere. But bear in mind, each credit application appears on your record and may affect your rating.
Having a good credit score is essential. It means you will be accepted for cheaper rates on loans and credit cards, and you will pay a lot less in interest. A good rating will also make you more likely to be accepted for a mortgage, a tenancy agreement, finance on a new car, and even a monthly phone contract. Even if it doesn’t seem important or necessary to you right now, there is a good chance that a negative credit score will come back to haunt you later in life. It is a good idea to deal with any potential credit issues now before they get any worse.
If your score is lower than you like, there is no need to panic. There are plenty of ways to improve your credit rating, as well as some workarounds to lessen the impact of a bad score on your life.
How to improve your credit rating
1. Check your credit report
You don’t know how bad your credit really is unless you check your credit report. After all, sometimes, lenders and banks do make mistakes. Anything from a misspelled name to an extra zero mistakenly added onto a payment means incorrect information will be passed on, and your credit rating will suffer. Simply getting these errors corrected will be a solid step in the right direction. Even if everything is above board, knowing your credit status will give you the information needed to build it up to an acceptable level.
2. Keep up with payments
Missing even a small payment can affect your credit score for years to come, so make sure you keep on top of all your debts and stop your rating from getting any worse. Credit cards, loans, mortgages, and even utility bills can all influence your score. It’s easy to forget to pay your energy bill on time, but setting up direct debits for all regular payments is the best way to ensure you never miss a payment and protect your credit score. You don’t have to rely on your memory all the time. If you are struggling to keep up with any repayments, talk to your lender about changing your repayment plan. Missing payments altogether will be disastrous for your credit rating, and you may have less of an impact by arranging a longer repayment plan with higher interest rates. A lender should treat you sympathetically if you are in financial hardship.
3. Pay off your debts
If you have any debts hanging over you, you should take steps to pay them back as soon as you can, or at least start a debt repayment plan. Pay off your credit card bill at the end of each month, and if you can’t pay it all of at once, consider pausing your cards until you can. Spending on credit while in debt does not cast you in a favorable light.
4. Use a credit card responsibly
If you have a low credit score, continuing to use a credit card may seem counterintuitive, but it can actually improve your rating if done responsibly. By spending sensibly on your credit card and promptly repaying the balance in full each month, you make yourself look more trustworthy and show lenders that you are capable of borrowing money and paying it back.
5. Stop applying for credit
Whenever a lender checks your credit to decide whether or not to accept your financial application, this check appears on your record. Attempting to borrow money from too many sources can make you look like a risk and make you less likely to be accepted. If possible, work on improving your credit score before making any financial applications.
6. Maintain your good credit score
Once you have boosted your credit score to an acceptable level, you don’t want to fall back into bad habits and have to do it all over again. You will need to maintain your solid credit rating. Do this by continuing to make all payments on time, keep a low credit card balance, and only seek to take out new credit when you really have to.
Workarounds when you have a low credit rating
Sometimes there’s just no getting around it. You need to rent a new apartment or buy a new car, and you can’t let your low credit rating get in the way. You shouldn’t be discouraged. Usually, there is sufficient wiggle room to allow your application to be approved while you work on improving your credit score in the background.
1. Employment
When applying for a new job, there is a chance that they will run a credit check on you to determine how reliable you are. This won’t happen all the time, as only certain employers are legally required to conduct credit checks on employees, but it could make or break your success in applying for your dream role. If the subject of your credit comes up, you should be prepared to explain yourself. Prepare an answer which details the reasons that contributed to your low credit rating, how they will not impact your work performance, what you learned from the experience and the steps you are taking to improve your score going forward. Being honest and proactive will cast you in a positive light.
2. Buying a car
When taking out finance on a vehicle, a low credit score might mean you have to take on a less favorable repayment plan. If you can delay your car purchase until you have improved your credit score, this will reduce your interest rates. However, if it’s not possible to do so, you may need to pay a sizable down payment upfront to lower your monthly payments. Although a significant investment at first, this will save you a lot of money in the long run and may make it easier to repay, thus improving your credit score. Another option is to get someone with better credit to cosign your loan to receive lower interest rates, but make sure you keep up with payments, or you will be putting this person in jeopardy.
3. Accommodation
When it comes to home loans, banks are loosening their standards so that more people will be able to be accepted for a mortgage. Many mortgage brokers will be more lenient and offer various plans for people with bad credit. Be prepared for a larger down payment or higher interest rates. If you are looking to rent an apartment, you will have an easier time. Although landlords will look less favorably on tenants with poor credit, you may be accepted by offering to pay a higher security deposit.
4. Phone contracts
Even something as small as a phone contract can be affected by a low credit score. Some providers will not offer monthly plans to someone with a low rating. If this affects you, many phone providers allow you to get a SIM with no credit check. Alternatively, you could opt for a pay-as-you-go SIM whereby you top it up yourself as and when you need to.
In summary, having a low credit score isn’t necessarily a financial death sentence. By eradicating your poor payment habits and eliminating any debt, you can stop your score from getting any worse and start boosting it back up. If your score is low, you may still be able to buy a car, take out a mortgage or find a job without issue, but the best solution is always to work on improving your rating from the outset.
