The Importance of Credit Scores

Your credit score plays a crucial role in your life, impacting major financial decisions. Understanding what can impact your credit score is essential, as it affects everything from applying for a mortgage to seeking a personal loan or even renting a property. Lenders use your credit score to assess risk and determine whether you’re likely to repay borrowed money. A good credit score can open doors to better interest rates and favourable financial opportunities, making it essential for your financial planning.

This month marks financial literacy month, and as a prover of both financial wellbeing benefits and financial services, we can’t stress enough about how important financial education is.  It shapes not only the decisions you make but also how you feel towards money overall. One area many people remain unsure about is credit scores, so we’re here to shine light on it.

Payment History

The most critical component of your credit score is your payment history. Timely payments on existing credit accounts are essential. However, 57% of young people (18-24) don’t realise that late or missed payments can negatively impact their credit score, according to research by TransUnion. Lenders view missed payments as a risk factor, which can lower your score and make borrowing more expensive in the future.

Credit Utilisation

Managing your credit limits effectively is also key. Even if you consistently pay on time, using too much of your available credit can negatively affect your score. Surprisingly, only 32% of young people are aware that using a high proportion of available credit can have a negative impact on their score. Lenders may worry that high credit usage signals financial strain, which can reduce your borrowing potential.

Length of Credit History

The length of time you’ve had credit also plays a significant role. A longer credit history, even if some accounts are closed, can positively impact your score. Most credit reports cover a period of six years, meaning that older accounts still contribute to your overall credit profile.

Types of Credit

The variety of credit accounts you hold – such as credit cards, loans, and utility bills affect 10% of your score. A diverse mix of credit types demonstrates your ability to manage different financial responsibilities, which can be appealing to lenders.

Credit Inquiries

Too many applications for credit in a short period can weaken your score. However, 64% of young people are unaware that making multiple applications for finance over a short time can negatively impact their credit rating. Lenders may see frequent inquiries as a red flag, suggesting financial instability. Being mindful of this factor is an essential part of maintaining good financial wellbeing.

Take Control of Your Financial Future

Understanding  your credit score is essential for maintaining good financial health and effective financial planning. By prioritising timely payments, managing credit utilisation, and being aware of how various factors affect your score, you can take proactive steps toward improving your creditworthiness.

By staying informed and managing credit responsibly you can take control of your financial future with confidence. If you have any concerns, get in touch with a member of our team.