It can be very frustrating when you’re paying your bills on time, staying within your credit limit and paying off your credit balances at the end of the month. However, there seems to be no impact on your credit score. Here are few things that may make your credit score more like a turtle and less like the hare:
You don’t use credit but you have credit account(s)
- If you have a credit account e.g. a credit card and you’re not using it, it will be difficult to build a high credit score. Credit scores are based on your credit history so you will have to use credit to improve credit or your report will stop being updated.
Your past is dragging you down
- Take a look at all aspects of your credit history. A large negative financial mistake in the past could still be producing some effects and can do so for up to 7 years. Reaching the 7-year mark doesn’t mean it will be automatically removed. You may need to contact the creditors to get it removed.
- Dispute your defaults or late payment notations. 80% of those that are disputed are removed from the credit report.
- If it is not something you can dispute, it is best to focus on other aspects of your credit report you have control of. Like a fine wine, credit scores get better with age, as long as you keep your credit accounts in good standing.
There are errors in your report
- Weirdly enough, information that doesn’t belong to you can end up on your credit report. Wrong names, wrong addresses or even misspelt names due to errors from creditors and credit bureaus can have a negative impact on your credit score. This increases the need to check your credit report regularly. As the single most important document a lender reviews to see if you qualify for credit, the information on it must be accurate.
Your credit utilisation ratio is high
- Credit utilisation ratio is how much total credit you’ve used or owe (the balance) divided by your total credit limit across all your credit accounts. This ratio is seen as a good indicator of whether you’re managing your finances. It’s usually written as a percentage. So if you have a £5,000 total limit across your credit accounts e.g. two credit cards and an overdraft and you’re down £2,500 across one or more, you’ll have a rate of 50%. Exceed 30% at any time and you’re on dangerous ground and points start dropping off the credit score. Studies show that those with high credit scores only use about 1-10% of their limit so aim high.
- If you find you’re reaching the 30% mark on one credit account, switch to another, it’s simply maths as you can spread the ratio over more than one credit account.
- It’s a good idea to set up balance alerts so you have a bit of time to act before the impact on your score.
- Worst case scenario, you can also contact your issuer to increase your credit limit if you find you’re hitting the 30% mark. Your credit score will take a few knocks but it is beneficial in the long run as your credit utilisation will decrease. As long as you don’t increase your debt.
- Another trick is to find out when your lenders report your balance and payment activity to the credit bureau. This is usually once a month. If it doesn’t sync with when you pay off your balance then it will always look like you have a high balance. So find out and pay off as much of the balance as you can before that date every month.
A credit score is what lenders use to determine how risky lending money to you will be. This rhetoric falls flat on its face when those who never use credit but are wealthy have low credit scores. Doesn’t that mean they are not financially stable?
Having a credit score above 850, according to Experian, opens me to get approved for high credit limits. If I utilise and max out the credit I’ve been given, my credit score would reduce and it’s back to the drawing board with poor credit. So what’s really the point of having the higher limit?
A high credit score can help when you’re trying to secure a loan yes! But it’s not the be-all and end-all. It’s important to be more interested in the effects of your outstanding debts rather than whether or not a high credit score means you can secure a loan you don’t really need.
I am of the opinion that if you don’t need credit, don’t get credit. Sometimes using credit deceives you into thinking that the item you’ve purchased has already been paid for until you get to the end of the “buy now, pay later” period and the bill comes around.
Create a budget, make a plan to get out of any existing debt spend within your means, don’t buy anything you can’t afford and you’ll be well on your way to a credit score that may not be excellent but still gets you the best borrowing terms.
Recommended book: Rich Dad’s Cashflow Quadrant
Check your credit score and report free here today, updated every month:
How about you? Do you have any tips on increasing credit scores? How do you feel about credit scores? Am I missing the mark? Let me know!