You may not realise it until you apply for a mortgage, credit card or loan but your credit score – a figure from 0-1,000 designed to represent how likely you are to pay your bills on time – can play a vital role in what you can and can’t do financially.
Building a good credit score helps lenders understand how responsible you are as a borrower. The higher your credit score, the higher your chance of accessing better interest rates. If your credit score isn’t exactly where you’d like it to be, whether because you’ve made payments late or never had a credit card, there are ways to improve it.
Here, Kamini Patel, analytics director at the credit monitoring company Equifax, answers six handpicked credit questions, and offers her tips on how to build up a good credit record.
Q: I’m worried about interest rates fluctuating. Do changes in interest rates affect my credit score?
Kamini Patel says: Interest rates have yo-yo’d in recent years but, whether rising or falling, they don’t directly affect your credit score. The biggest factors for your credit score include how reliable you’ve been at making payments when they’re due, how long you’ve been making payments to keep your credit agreements up to date, and how much of your available credit you’re using.
What changes in interest rates can affect is how much you’re able to borrow, and at what rate, when, for example, you’re applying for a mortgage. A higher interest rate can increase the size of potential repayments, and while your credit score itself isn’t directly impacted, this could reduce the amount a lender is happy to offer you.
Q: I’m working hard to improve my credit score by reducing my debt. Does a better credit score have an impact on my credit card interest rates?
KP: Firstly, congratulations on making strides in reducing your debt. When you’re applying for a credit card, lenders will look at a range of factors, including your past behaviour when it comes to managing credit, your income and whether, based on your current finances, you can afford to repay any money you might borrow on your credit card.
When lenders make these decisions, the credit score itself is a strong indicator of your likelihood of being able to pay back credit so, generally speaking, higher credit scores are more likely to give you access to more favourable rates of interest – as you are more attractive as a customer.
If you’re continuing to reduce your debt, it implies that you’re making repayments on a consistent basis so that’s a really positive move in improving your credit score.
Q: This year I’m trying to budget my money/bills more effectively. How can budgeting build a stronger credit score?
KP: Budgeting is a great way to work on your credit score. In simple terms, it’s good for your financial health to see what’s going out of your account compared with what’s coming in. And if you focus on those two elements, it also helps you to manage any debt in a consistent way because you can see what you have available to put towards paying off debts.
Having that visibility helps you manage your money better and keeps you up to date with your repayments more effectively. If you’re consistent in those payments, that will have a positive impact on your credit report and credit score. Overall, consistent and positive behaviour will ultimately help boost your credit score.
Q: Is an affordability score different from a credit score, and how can I improve it?
KP: Good question. An affordability score is quite a broad term but, generally speaking, it assesses whether you have enough income to cover any future credit/debt repayments. It looks at what disposable income you have each month after meeting financial commitments such as energy bills, council tax and existing credit/debt repayments. If you’re looking to improve your affordability score, budgeting – and sticking to it – is the best place to start.
A credit score, on the other hand, takes a longer view of creditworthiness, looking at, among other things, whether you’ve made repayments on time in the past. It’s a numerical score that represents your credit history. Lenders use it to determine whether you qualify for a particular credit card, loan, mortgage or service, and as evidence to determine a person’s ability to make repayments on time.
There are a number of ways to improve your credit score. First, make sure you make any repayments due on time – this will help prove to lenders that you pay back what you borrow. Make sure you’re registered on the electoral roll as this allows lenders to verify your identity. Also, making too many applications for credit in a short space of time can have a negative impact on your credit score so aim to limit them, and space them out if you do need to borrow money.
Q: I’m struggling with the rising costs of bills. How will missing a payment impact my credit score?
KP: The first step is to contact the utility companies or lenders and explain your situation. Many are understanding and will try and work with you to find a plan that suits you. If you’ve missed payments, this can affect your credit score as it sends a signal to a lender that you’re experiencing some level of financial difficulty and might face potential challenges in paying back any new credit.
It’s worth noting that there is a wide spectrum when it comes to missed payments. Missing a couple of payments that you quickly repay may be viewed differently than if arrears build up for a number of months across several companies. The further you are along that spectrum, the greater the impact on your credit score. Remember, missed or late payments are recorded on your credit report for six years and will be seen by lenders if you’re applying for credit.
Q: Several years ago, I defaulted on a payment to a phone company. I’m now applying for a mortgage but the bank is refusing to lend me the money due to the past default. Is there anything I can do?
KP: Let’s start by explaining what a default is: a default is when a borrower has consistently missed a sequence of payments and therefore fails to repay a debt. This is recorded on your credit file and remains there for six years. Having a default can make it more difficult to organise a loan, credit card, and even a mortgage. You don’t mention how much you defaulted by, but lenders’ attitudes towards defaults will depend on the amount of debt you accumulated, when it was, and if you missed any other payments.
If you have an issue on your credit report, we encourage you to speak to the credit reference agency as it can often contact lenders and banks on your behalf. Also, I’d advise you to contact the phone company and see if there’s any outstanding debt to pay off. Lenders will look more favourably on the situation if the debt has been settled.
Want to know more about how your credit rating stacks up? Find out by heading to the Equifax website
