What is credit history?
Your credit history is almost like a logbook of your financial past. It’s a way to keep track of your borrowing behaviours, financial obligations and commitments as well as payment patterns you currently have or have had in the past.
This may not seem like the most useful thing in your day-to-day life, but it is crucial when it comes to borrowing money. Lenders (like credit unions and banks) will look at your credit report as a way to assess your ability to repay a loan or credit card based on your credit history.
Your credit score is a number based on your credit history. This is usually calculated by how good or bad you are at repaying loans and showing good and reliable financial behaviours. Even small things like paying your phone contract on time contribute to your credit score. You can track your credit score through credit agencies like ClearScore and Experian.
How does credit affect borrowing?
Although each different lender bases their decision to lend on different criteria, all lenders will look into your credit history.
Some lenders may have an automated system where the answer is yes or no based on your credit score. If your credit score is low, doesn’t meet their required number or you have a proven track record on your credit history of missed payments, a lender may charge you a much higher rate of interest or simply reject your application. This is because you are seen as a risk.
However, some lenders, like us, will look into your credit history manually to make a fair decision. This process is called manual underwriting. We choose to work this way as we believe this is a fairer way of banking. We will look into your most recent spending/borrowing habits as a low credit score could be based on a problem that happened years ago.
What is bad credit?
Some things that may result in your having a low credit score are:
- Multiple missed payments and defaults to different lenders
- A large amount of hard credit checks done by companies when assessing your credit history
- A County Court Judgement (CCJ)
Having these elements on your credit report will result in lenders seeing you as high risk, and could put them off lending money to you.
How do I improve my credit score?
There are a few ways to improve your credit score. Although defaults will stay on your credit report, you can prove to a lender that you are no longer a risk by changing your financial habits.
Stay on top of your repayments
The best way to improve your credit score is to make sure you are repaying your loan or credit agreements on time and within the agreed conditions. If you ever find yourself struggling to keep up, you should contact your lender as they will want to create the best solution to benefit you both.
Show your reliability
It’s best to keep a good track record to show your reliability and good financial habits. It might sound silly, but the more loans you take out and pay off successfully, the better your credit score will be. This is because you are continuously showing that you have not been a risk to other lenders. This will really help when applying for large loans e.g. mortgages or cars.
Keep up to date with your report
It’s good practice to regularly check your credit report. There may be times when it has not been updated properly, or when something has been added by mistake. You can also track which credit accounts you have open and cancel any credit cards you no longer need. Another way to improve your credit score is to make sure you are on the electoral roll.