Having a low credit score can hold you back in a number of ways and it can have a negative impact on your financial life. There are a number of ways in which you could end up with a bad credit, from missed or late repayments to lack of credit history, whatever your reason for ending up in the situation, it’s good to know that you can come back from a low score. The guide below looks at the top 5 ways in which you can help to improve a bad credit score and increase your chances of being approved for a car loan or any finance product.
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How does bad credit score affect you?
A bad credit score can be having a negative impact on your financial life and can influence your ability to get approved for loans, mortgages, credit cards and can also affect your interest rate too. A higher interest rate can affect your monthly payments and make the cost of borrowing more expensive than it needs to be.
A low credit score can lead to:
- Being refused for loans or finance. A bad credit score usually indicates missed or late repayments in the past and can include the effect on car loans with bad credit, getting a mortgage for a house, credit card acceptances and even a mobile phone contract in your name.
- Harder to rent a property. Many landlords may want to see your history of repayments and the likelihood of you paying your rent back on time and in full. If you’ve a long history of missed payments, you may be rejected.
- Higher interest rates. Lenders usually reserve the best APR rates for people with good credit scores as they are less likely to default on future loans. Lenders may set a higher interest rate when you have bad credit to help reduce the risk.
How to increase your credit score in 5 easy steps:
It’s worth remembering that a low credit score can’t be fixed in an instant and it’s all about building new financial habits first and taking some time to work on your score before you start applying for future loans or credit.
1. Check your credit report.
The first thing you should do is check your credit report and the information that is listed on there. Having information on your credit report that isn’t up to date can be negatively impacting your credit score. It’s also important the information on your credit report matches that on your finance application or else lenders may worry that it is a fraudulent application on your name. If you need to make any changes to your credit report, you can contact the credit referencing agency who provided your report for you.
2. Make payments on time.
Building new financial habits can include keeping on top of your current payments. To help show future lenders that you can be trusted to meet the deadlines of any financial agreements, you need to start now. All payments should be made on time and in full and you could consider setting up direct debits to take these payments automatically. If you’re struggling to meet payments due to income, you should never miss the payment and instead speak with your lender first to see how they could help.
3. Reduce debt.
It can be hard to budget for another loan if you already have high levels of existing debt. How much debt you currently have can also be affecting your credit score too. High levels of debt has a negative impact on your credit report and can make it harder for you to manage your money. Before any application for finance or credit, you should try to pay off as much debt as you can first before you start applying for finance or loans to help make them more affordable and increase your credit score.
4. Don’t apply for any new credit.
When you apply for credit whilst trying to better your credit score, you will usually have to undergo a credit check. New credit checks on your file can negative impact your score if you make multiple applications for finance in a short space of time. If you’re trying to rebuild your credit score you should try to not apply for anymore loans or finance during this time to help protect your score.
5. Keep credit usage under 30%.
The credit utilisation ratio is used by credit referencing agencies to help credit better financial habits. It is recommended that you only use around 30% of your available credit limit and pay more than the minimum credit amount each month. For example, if your credit limit is £1000, you should only spend around £300 of the limit and pay it off on time.