When lenders assess your eligibility for credit products such as loans and credit cards, they carefully review your credit score. This score is a crucial factor in their decision-making process. A low credit score can indicate poor creditworthiness, making it more challenging for you to secure a loan or credit card.
Your credit score reflects your financial management and repayment history for borrowed funds, including credit cards and loans. If you’ve never applied for credit, you’re considered "new to credit" and won't have a credit score. Conversely, if you’ve successfully managed loans or credit cards by making timely payments, you have a good credit history. However, failing to repay loans on time will negatively impact your credit score. Each credit reference agency has a different score range, you can find those details at the respective links below:
Let's delve into what each credit score rating means:
- Poor - Your credit application will likely be rejected.
- Fair - Your credit application has a chance of being approved, but will likely be given a low limit and charged a high interest rate.
- Good - You should be offered fair interest rates, but may have a low initial credit limit.
- Very Good - Your credit application is likely to be approved, but you will not necessarily be offered the most competitive interest rates.
- Excellent - You’re highly likely to be approved for competitive credit offers.
Your creditworthiness is represented by a numerical score. If your score ranges at “Fair” or lower, you should focus on improving your credit rating to secure loans with better interest rates. Keep in mind that different credit agencies use different algorithms to determine your credit score.
Why do I have a bad credit score?
Several factors can lead to a poor credit score:
- Payment history: Paying on time enhances your credit score, while missing payments lower it. The impact of recent late payments is more severe than older ones, so consistently making payments on time is crucial.
- Multiple loan applications: Applying for several loans or credit cards in a short period can harm your credit score. Each application triggers a hard credit inquiry, which deducts points from your score. Learn more about the impact of hard credit inquiries here.
- Credit utilisation ratio: This ratio measures how much credit you use compared to your total credit limit. A high credit utilisation ratio negatively affects your score. Aim to use no more than 30% of your available credit.
As mentioned above, maintaining a good credit score has numerous advantages, including higher approval rates and better loan terms.
How can I improve my credit score?
Improving a bad credit score requires time and effort. Feel free to check out credit score building article, but for now, here are some steps you can take:
- Review your credit report: Regularly check your credit report to identify the causes of your low score. Understanding these issues is the first step toward addressing them.
- Pay down debts: Focus on repaying your debts, especially those with high interest rates. Reducing debt will positively impact your credit score. Incredible can make paying all your credit cards easier, with just one single payment, automated for you every month.
- Start building credit: If you have no current credit accounts but have a poor score from past issues, consider getting a credit card. Use it for small purchases and pay off the balance on time to start improving your score.
- Dispute errors: If you find errors on your credit report, dispute them with the credit bureaus. Correcting mistakes can help boost your score.
By understanding how credit scores work and taking proactive steps to improve yours, you can enhance your financial opportunities and stability.
