Handling your personal finances is not the easiest thing in the world. There’s a reason so many of us are tripped up by ostensibly basic stuff: a financial literacy gap, worsened by successive financial crises that fundamentally impact the average household. It’s not easy to save for an emergency fund when so much is required just to stay afloat; who has the time to find out which accounts are the best for their meagre savings when they’re likely to be swallowed up next month anyway?
This disparaging picture of present-day household finances isn’t the full truth, though. It is more so the case that households with poor financial literacy are attempting to claw back from difficult times, and have a harder time of it than others. This isn’t to say that such a clawback is impossible. If you’re struggling to understand your own finances, let this be part of your new financial literacy journey. Knowing your credit score, and what it means for your finances, is a crucial preliminary step to regaining control.
What is a Credit Score?
Credit scores are commonly misunderstood, but really quite simple. A credit score is an independent evaluation of the financial risk you pose to banks and other lenders, predicated on a number of individual factors. Rather than having an official credit score, the term refers to analyses undertaken by one of three major credit reference agencies in the UK.
Why Your Credit Score Matters
Why does this matter, though? Well, banks and lending institutions use credit reports from these agencies to inform their decisions with respect to granting you access to certain financial products. A poor credit score indicates to a potential lender that you are a potential risk – which could lock you out of accessing loans, overdrafts, or even a mortgage.
What Can Affect Your Credit Score?
There are various different factors that impact your credit score, all of which feed into your risk potential with respect to debt. Your age and regional location are basic factors, but more impactful would be your history of taking out or repaying debts.
If you’ve taken out multiple loans, and/or failed to meet basic repayment expectations multiple times, these are indicators that you are a high-risk client for further lending. Even if you’ve never taken out a loan in your life, your credit score can be low simply for the fact that you are an unknown quantity to lenders.
How to Improve Your Credit Score
With this in mind, what can you do to improve your credit score, and access better financial products? If you have no credit history to speak of, you can take out a credit card for bad credit and use it regularly; providing you pay it off in full each month, you’ll build up a positive credit history and improve your score accordingly.
If you are struggling with multiple debt sources, the route to a better credit score is, quite simply, paying them off. Making regular payments improves your score; you could also use bad-credit loan products to pay off some sources entirely, consolidating debt and making it easier for you to pay off.
