Maintaining an excellent credit rating is essential for anyone looking to borrow money. Simply put, your credit rate determines how creditworthy you are to lenders. If you have a good score, then they know they can trust you, which usually results in loans being approved and applications accepted. But, if your score is bad, then you will find it very hard to get credit from anywhere, and would be worthwile to fix your bad credit issues before you apply for a loan.
The question is, what can make a credit rating go from good to bad? The reality is that there are multiple things which have a negative impact on this rating. Consequently, it’s important to learn what they are so you can avoid them.
Poor Payment History
Your payment history can have an adverse effect on your credit rating if it’s not up to scratch. People who continuously make late payments will end up with a bad score. Especially if these payments are considerably late, and you’ve even been ordered to make them. This doesn’t just apply to your credit payments, it applies to any payments you make in life. For example, if you’re not paying bills on time, then you’re not deemed very creditworthy.
Too Much Debt
If you have a lot of debts and owe money to multiple people, then this has a negative effect on your credit rating. Especially if you’re not paying back your debts and can’t afford to do so. This indicates to lenders that you’re clearly very irresponsible with your money and don’t have the financial capacity to borrow money. From their perspective, it’s too much of a risk to lend you money as they can see that you end up in debt and struggle to repay previous lenders.
Poor Credit Utilisation
This complicated term is actually very easy to understand. Essentially, it refers to how much credit you have, and how much you’re using. For example, if you have a credit limit of £5,000 – but you only use £1,000 – then that’s good. However, if you use most of your available credit and are pushing close to your limits, then this has a negative impact on your rating. It shows that you’re always dependent on borrowed money rather than your own finances.
Lots Of Open Accounts
Another thing that alters your credit rating is the number of open credit accounts you have. If you’ve got lots of accounts – and they all have balances to show you’re using them, then this isn’t good. It basically tells a lender that you’re in desperate need of credit as you keep opening accounts to get it.
Too Many Recent Applications
On a similar note, the number of recent applications you’ve made will have a significant bearing on your credit rating. If you’ve made a lot of requests for credit in a short space of time, then your score will suffer. Again, it shows you’re desperate for credit, which doesn’t make good reading for a lender.
How do these factors affect your chances of getting a loan or credit?
The reality is that these factors will make it harder for you to get a loan or credit. If your credit rating has been negatively impacted, then you’re seen as a high-risk borrower. Think about it from the perspective of a lender; what type of person do you want to trust with your money? Is it someone who’s already in a lot of debt, doesn’t make payments on time, has loads of credit accounts with balances close to their limit, and keeps making applications for more credit? Of course not, there’s less chance you’ll get your money back on time if you gave it to someone like this.
However, this doesn’t mean you will struggle to get any loans or credit at all. People with lousy credit ratings often do get accepted, but they don’t always get the money they want. Usually, you end up with a lot less or paying a very high APR.
The critical thing to take from all of this is that you must pay attention to everything that negatively affects your credit rating. By knowing what can bring it down, you can work on preventing this and bringing it back up. If you’re looking to take out a loan or apply for a credit card, then you should do so with the best possible credit rating. This puts you in a much stronger position, and there’s more chance you’ll be accepted and get what you’re after. So, work your way down the list to ensure none of these factors harms your rating going forward.