Written by: Toni Foot
Having a good credit score is important when you want to take on new credit such as a loan, mortgage or credit card. Although there is no definitive method of determining your credit rating or ‘score’ (each company will have their own ‘ideal’ customer for their products) there are some obvious factors that will almost certainly affect your likelihood to be successful in your application for credit.
Late or non-payment
Of course, having a history of late or non-payment of loans or credit agreements will affect your credit rating quite significantly. If you have had debt written off or if you have become bankrupt then your credit rating may be quite low.
We all know that failing to pay when we have a loan will affect our credit score but there are a few other things that affect your credit score that you may not be aware of.
If you have joint debts with someone who has a history of bad debt management then you will also be affected by their problems. Make sure you understand any past debt problems of individuals you plan to share new credit agreements with before you commit to anything.
Short credit history
If you have too many credit cards cluttering up your wallet think carefully about which ones you want to weed out. Closing an account that you rarely use but have had for a long time may have an adverse effect on your credit rating because closing this account will reduce the length of time your credit history spans. A better plan would be to keep your oldest account open and close down any more recent accounts that you don’t really need anymore.
The type of debt makes a difference
There are two key types of debt: installment debt and revolving debt. Installment debts are those for things like buying a new car. At the end of the agreed period you have paid off the debt. Revolving debt is what you have on a credit card; you can pay it off but can also borrow more. Installment debts are perceived more favourably when calculating your credit score. You also get credit for managing a variety of debts (a car loan, mortgage and credit card for example). Try to avoid having too many revolving debts at any one time.
Inquiries about debt affect your credit rating
If you are looking for a loan, be careful about making too many inquiries. Applying for several credit agreements in quick succession can look like desperation to lenders and therefore make your rating lower. This includes things like mobile phone contracts that you may not think of as loans. On the positive side, any inquiries into mortgages will be grouped together and counted as one, as long as they are made within a 30 day period.
Being turned down for new credit agreements
Avoid applying for credit that you don’t need or are not likely to get. If you are not sure if you can afford a new credit agreement, ask them to do a ‘quotation search’ rather than a ‘credit search’. This may help you to decide whether or not to proceed without risking being turned down.
If you feel that you are at risk of missing payments on an existing debt, contact the company directly to discuss how you could go about repaying the money before getting too far into debt.