Every time you apply for a loan or apply for a credit card, you would hear about credit history, credit rating, or credit score.
Banks and many lending institutions still consider a borrower’s credit history, especially if he wants to borrow a significant amount. But what are credit history, credit score, and credit rating?
In business terms, credit is one’s ability to borrow money or avail of goods and services and to pay them later. There are credit reference agencies in the UK that collect information about clients’ behaviour towards paying their debts. The record comprises a person’s credit history. People that pay their financial obligations religiously get a high score and rating while those that are delinquent payers get a low score and rank.
Lending companies can check a person’s credit score through major credit reference bureaus such as the Experia, Equifax, and TransUnion. A loan applicant with a bad credit score would have difficulty in borrowing money from banks and other lending institutions. Building an excellent credit rating is a must so that you would be able to borrow money or acquire goods and services on credit.
You are aware of the things that you must do to enhance your credit rating but how about the things that you must avoid, which are just as important? If you want to have an impressive credit rating, here are the things that you must prevent from doing.
Lenders extend loans with the understanding that you can pay what you owe them. Missing a payment even just once would reflect in your credit record, and your score would go down some points. After you have taken out a loan set up an account where the amount due for your loan can be transferred to the lender automatically. Replenish the amount in advance to make sure you have the money for the next payment. Having small amounts due every month is not a reason to take your debt for granted. Missing a mortgage would make your credit score look poor.
Using to the Maximum Credit Limits
A credit card comes with a spending limit. First-timers may have lower card limit compared to those who have been using their credit card for years. One thing to void to keep a good credit rating is spending up to the maximum of your card limit. To lenders, this means that you are in a bad financial situation because you depend on your card for buying things. Make sure to utilize around 65% of your card limit and settle the balance without fail every month.
Avoid Setting up Accounts Frequently
Some people open a bank account and close it a few months after. Then, they set up a new account again. Doing this once may not affect your credit score. However, if you open a new account frequently, your credit score could go down. Banks usually check your credit history when you open an account. The credit reference bureaus interpret the inquiry as an application for a new loan. Hence, your credit could suffer from such investigations.
Applying for Credit Often
When you apply for a credit card or purchase something on credit, the company to which you apply would conduct a credit check. If you applied to different companies, several inquiries would appear on your credit record. They could mean that you are having severe financial problems, resulting in a plunge on your credit rating.
Avoiding doing the things mentioned above will help result in an excellent credit score that will qualify you in any loans, be it a short term loan or a long term one.