Financial Planning

Understanding Credit Scores: Your Path To Better Credit

Understanding Credit Scores: Your Path To Better Credit

Understanding Credit Scores: Your Path To Better Credit

Many of us understand the concept of credit scores in the broader context, but very often, the devil is in the details. In this article, we will look at how the credit scoring system works and how you can boost your rating – improving your access to credit in the future.

What is a credit score?

In its simplest form, a credit score measures your financial management skills. Ultimately, this reflects the likelihood that you will repay borrowings based on your credit history. A high score will boost your chances of obtaining additional credit, while a low score will reduce your options or, in some cases, increase the interest rate.

Your credit score will be referenced if you apply for various types of finance such as mortgages, credit cards, personal loans, overdrafts and any other kind of finance, including, for example, a car loan.

The components of your credit score

Before we look at ways in which you can improve your credit score, it is vital to appreciate the elements which make up your score:-


Variation of accounts

As long as you can control your finances, having a broad range of different accounts, such as bank accounts, credit cards, loans, etc., is a positive – allowing you to show your financial management skills.


Electoral roll

A failure to be noted on the electoral roll at your address will be a red flag to any credit rating agency and impact your credit score.


Court records

Defaults, IVAs, bankruptcy and other financial challenges in your past will impact your credit rating for up to 6 years. The older the event, the less impact this will have on your current credit score, it will fade over time.

Spending patterns

Those using credit rating agencies will be able to get an idea of your financial management skills and whether or not you are becoming more reliant on credit. There is no issue having debt; the level of debt and how it is managed will impact your score.


Bank accounts

The longer your history with a particular financial institution, for example, having an account with Barclays for 20 years, the impression is you are trustworthy.


Managing your accounts

While your payment history is the focal point, all other issues are considered, but it is essential not to miss any repayments or exceed your credit limit. If possible, make payments above your minimum amounts to show you have your finances under control.

Ways in which to boost your credit score

Conscious that the main aim of a credit score is to measure your financial management skills, there are ways in which you can boost your credit score:-


Regular credit card spending but no missed payments

As bizarre as it sounds, if the credit rating agencies see regular spending on your credit card, but you are also managing your finances, this is seen as a positive. But don’t miss any payments!


Close unused credit facilities

While keeping several old unused credit card accounts open for a “rainy day” may be tempting, this can negatively impact your credit score. The uncertainty of having additional credit available if required is not seen as positive by the credit rating agencies.


Don’t exceed your credit limit

Whether we are talking about credit cards, overdrafts or some other form of credit, try to stay within your credit limit. From the outside looking in, exceeding your limits, no matter the circumstances, suggests a lack of financial planning and management skills.


Exceed minimum payments where possible

There is no detrimental impact on your credit score if you only repay the minimum amount. However, there is a positive impact if you pay more than the minimum figure. This will also help to reduce the interest burden in the future.


Avoid cash withdrawals on credit cards

The fact that cash withdrawals on a credit card are more costly than traditional purchases highlights the potential danger to your credit score. A one-off withdrawal may be overlooked, but regular withdrawals may indicate deeper financial problems.


Avoid excessive credit applications


It is crucial to pick and choose the companies you approach regarding a potential credit arrangement. A scattergun approach could show several soft and hard searches on your credit file, which can, in some cases, suggest a degree of desperation.


In isolation, many of the suggested means of improving your credit score appear relatively minor, but their cumulative impact can be huge. Numerous online credit rating agencies offer free services so that you can track your score and manage it while enquiring about any rogue entries. Everything about the credit rating system is relative; credit to balances, debt to income, repayments to minimum payments, but above all, the score reflects your financial management skills.