For many areas of your life it will be important for you to have a good credit score. This includes applying for a loan or mortgage, looking around for car insurance and applying for a job in some cases. Having a bad credit score is better than having no credit history, and there are of course some lenders that will offer you a chance for short-term respite through bad credit loans, however, it is important to build a good credit score over time in order to be able to make those life changing decisions with as little friction as possible.
It shouldn’t take you too long to actually build up a good credit score from scratch but it’s not just about showing that you’ve always been good at repayments. Lenders want to be able to see that you’ve managed to work your way out of debt over a longer period of time too. Your entire credit profile will come in to play, not just your current credit score.
Ways to Build Your Credit Profile
There are a few things you can do to build up a good credit profile over time, other than just making your payments on time, which goes without saying really.
Long Repayment Periods – Having multiple accounts open, and that have been for over a year, it shows the lender that you are able to keep up on your repayment schedule over a long period of time. They are usually looking for accounts that have been open for over a year.
Sustainable Credit – A red flag to lenders is when an individual applying for a loan or finance has shown that they have acquired multiple credit cards over a short period of time. This frenzied flurry of financial activity could indicate that you are in trouble, and not worth the long-term risk.
Owe a Percentage of Your Available Credit – If you’ve got to your maximum limit on all of your credit and are struggling to bring the total owed down, this is not a good sign to lenders. A good figure to aim for is to only owe around a third of your overall credit at any given time.
Debt to Income Ratio – If a large percentage of your monthly income is used to pay off your credit debt, this is a warning sign to potential lenders. Keep the debt to income ratio as low as possible to ensure you are never in further financial trouble after maximising your borrowing
Once you have built up a good credit score it is important to look after it, maintaining that good score to ensure you always have access to the financial services and goods that will be of assistance to you as you build your life. There are a few ways in which you can do this, including:
- Keeping a limit on the number of accounts you have open at any given time. Never stretch your finances too thin, as this might have an impact on your ability to make repayments in full and/or on time.
- Try not to use the entirety of your credit limit unless it is an absolute necessity. It is good practice to utilise around a third of your credit limit to give you a better chance of clearing off the debt in good time.
- Always plan to be able to make monthly credit payments on time, and if possible clear your balances on a monthly basis when the payment due date rolls around.