Do You Have a Bad Credit Score? Here’s What You Need to Know

By: Boris_Dzhingarov

You don’t need a degree in economics to know that rising inflation, which hit 10.7% at the end of 2022, is beginning to squeeze household finances. With credit card debt reaching an average £2,290 per household in November 2022, it’s likely borrowing will increase as households try to manage their increased financial burden.

With the cost of living going up, now is a good time to look at your own personal finances for ways you can improve your financial health.

One particular area to focus on is your credit score. A poor credit score could be having a negative impact on your finances. Here, we look at what causes bad credit and how you can improve your score so that you’re in a good place should you need to borrow money in the future.

What causes bad credit?

While there are many things that can cause bad credit, some factors are particularly impactful. These include:

• Making late payments

Part of your credit score is based on your payment history. Late payments can have bigger impacts the more that are recorded, as well as how late they are made. Paying on time also minimises the risk of being charged late fees. Setting up a Direct Debit to manage your payments could help.

• Missing payments

Unsurprisingly, missing whole payments is even worse than paying late, and every month that this occurs, you’ll incur charges and it’ll affect your credit score.

• Too many hard searches

Soft credit searches are used by lenders and eligibility checkers to see how likely you are to be given credit. They have no impact on your credit score. However, if you go on to apply for credit, this will then be recorded as a hard search. A lot of hard searches on your credit file could be an indicator that you’ve made multiple applications for credit and, whether you’ve been successful in your application or not. These can stay on your credit file for up to 12 months. To avoid getting too many hard searches, only apply for credit if you’re eligible for it. Use an eligibility checker to help work out what credit you can apply for.

• No credit history or missing information

Younger people and recent arrivals to the UK may have low credit scores simply because they don’t have much of a UK financial history. Getting a credit builder credit card, even on a low credit limit, using it and making sure you keep up with payments is one way to build up a credit score.

How does this affect you?

• Bad credit can prevent you from taking out loans or credit, for instance, if you’re a homeowner and you’re about to remortgage. If you have a poor credit score, taking steps to improve it could help to secure better rates. 
• \The types of credit cards and loans that you’ll be able to apply for will tend to have higher interest rates and lower credit limits. This is because customers with bad credit will be seen as less likely to manage their payments.
• Bad credit even applies to secured loans, as it can be incredibly difficult to source mortgages or car financing with a poor credit history.
• You may find that existing creditors are able to change their offers or your account’s terms and conditions if your credit score worsens, perhaps by lowering your credit limit.

How to improve your credit score

If you do have a low credit score there are some steps you can take to help improve it:

• Pay your debts on time

The first step is to pay down your existing debts, ideally through Direct Debits that are scheduled to pay by your due dates. If you’re having issues repaying a particular debt, speak directly to the relevant creditor to talk about your options and make arrangements that you can afford.

• Consider ways to build your score up

One of the best ways of improving your credit score is to build a positive history of managing credit, such as with a credit card. For instance, if you have a credit card you should use it to fund small, monthly purchases and make sure you always make at least the minimum payment on time.

• Check your credit report for errors

Request your credit report from a credit agency or credit checking service. You can identify key issues and areas for improvement, while also helping you prioritise debts. Similarly, you can review the information for any errors or debts that have been repaid. You’ll be able to ask for this information to be updated, which could potentially improve your score.

By Boris Dzhingarov

© 2023 Copyright Boris Dzhingarov - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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