- 06
- Dec
Your credit rating is an indication of how creditworthy you are. It is a simple three-digit number that is determined based on information from the major credit bureaus, including Equifax and Experian. The information contained in your credit report and the resulting credit score will have a major impact on both your ability to get credit and on the cost of borrowing and is especially relevant for large loans such as those for the purchase of a home or vehicle.
How Your Credit Score is Determined
Your three-digit credit score is determined based upon a number of relevant factors in your credit history. One of the most important things that determine your credit score is your payment history. If you have made all of your payments on time on your credit cards and other loans and debts, you will probably have a solid credit score and be considered a good candidate for credit.
On the other hand, if you have been late with payments, or not paid your debts as agreed, lenders are going to view you as a great credit risk and are not going to be interested in lending to you as a result. When it comes to late payments, the later the payment was and the more recently you were late, the bigger the impact the delinquency will have on your score. For instance, if you had one payment that was 30 days late a few years ago, it might not have a major effect. If you have a series of charged off accounts that are not paid as agreed, as well as a number of recent payments that are very late, then you will be considered a very poor credit risk.
Other Factors
Other factors also go into determining your credit score. The amount of available credit that you use is important and it is a bad idea to max out your credit cards and to charge up to the limits on the cards. Using too much of the credit that is available to you is a sign to the lenders that you might be getting in over your head in debt.
Likewise, having too many “inquiries” on your credit report will also send up a red flag to lenders and cause your credit score to go lower. Inquiries are posted to your credit report each time you apply for available credit and they stay on your report for several years after the time of your credit application. Too many will lower your score.
Finally, the age of your credit history plays a role in your credit rating. If you have a longer credit history, you will have a better score because there will be more data for creditors to look at to assess how responsible you are with debt.
What To Do If You Have Bad Credit
If your credit score is poor, the best thing you can do is to change your financial habits and to simply give it time. As you switch to paying your bills on time and being more responsible in your borrowing, eventually your credit score will start to climb and you will be more able to borrow money.
If you cannot wait to improve your credit score, you can also explore alternatives to getting traditional credit. For instance, for those who want to buy a home but do not have good credit to qualify for a traditional mortgage at a good rate, buy to let mortgages can provide you with an alternative way to get into property.