Your credit rating can determine your entire financial life. Whether you want to take out a mortgage, buy a car on finance or enter into a mobile phone contract, a poor credit score can expose you to higher interest rates or even prevent you from borrowing altogether.
What is a credit score?
A credit score is the rating attached to consumers which indicates to lenders your ability to pay back funds on time. It’s a risk indicator which dictates everything from your credit limit to your interest rate, and can be used to limit your risk to lenders.
The credit score is achieved by, you guessed it, getting credit. The common myth is that not taking credit is the best way forward and whilst paying for things when you’ve saved is often the most sensible approach as a consumer, it’s important to balance this with the need for positive credit history. There’s not one fixed way to calculate a credit score. Whilst there are some larger established organisations who have developed their own systems over time establishing trust with lenders, there are also many other players on the market and each one will determine its own score which can be measured in different ways.
What is the impact of a poor credit history?
Lenders use your credit history to decide whether or not to lend you money. This means just one late or missed payment can damage your credit score, as it suggests to lenders that you’re struggling to manage your money.
You might be surprised at the range of activities lenders analyse. For example, they often explore utility bills, bank accounts, overdraft extensions and even rent. This means keeping on top of your bills is really important.
Of course, sometimes in life a late or missed bill can be inevitable. For example, if you’ve cancelled a Direct Debit without notifying the receiving organisation, or if you’ve been made redundant. The extent to which your score is damaged depends on several variables, such as your previous history and how long it takes you to fulfil the late or missed payment.
The Benefits of Direct Debit
Thankfully, if your score is low there’s lots you can do to improve it and direct debit can really help.
Here’s how:
Avoid Late Payments
Paying your bills on time even for just six months will start to lift your credit score, so set up Direct Debits for all your regular payments, to ensure you never forget to pay.
Make Regular Payments
Direct Debits facilitate regular payments, which demonstrate your ability to pay bills on time, all the time. Reducing your credit card balance is a particularly great way to boost your score, so why not use direct debit to pay off even just a minimum amount each month?
Grow Your History
The more payments you make, the richer your credit history. Paying your bills by Direct Debit month after month, will quickly grow your history and show you’re a reliable borrower.
