We all know how we acquire and maintain a bad credit score. We also know what we must do to keep our credit score in good standing. Keep up minimum repayments, never default or miss a payment, and don’t have too many credit agreements. These are standard, simple, common-sense tips that your provider will always emphasise. Yet there are aspects of applying of maintaining and improving your credit score that most people do not know about. The following are useful tips to keep in mind if you ever need to apply for a bad credit loan to maximise your likelihood of acceptance.
How not to have a “thin file” credit history
Having a good credit score is about the fine line between having (or applying for) too much and too little credit. Poor scores often come with applying for too much credit, but so will failing to take enough credit options. A mobile phone contract is a credit agreement, as are paying utilities by direct debit, and some other monthly payment plans such as motor insurance. Each of these will improve your credit score.
While paying cash when you have the money is a good thing, it will mean having a low score by default. When it comes to needing credit – such as motor finance agreement or even a mobile phone contract – you may experience problems. The good news is that a successful credit application for a person with insufficient history will help keep a credit score healthy.
Always clear your credit card balance
Most advice concerning how much to pay states that the consumer should cover the minimum monthly payment as specified in the credit agreement. There are many reasons to do this, not least of all the negative impact on the credit score for failing to do so.
Lesser known advice concerns the impact of paying a much higher amount each month. This will have a positive effect on your credit score. The more you pay, the better your score becomes. Even better is aiming to clear your credit card balance every month. If you do this as often as possible, not only will you not pay interest, you’ll find your credit score improves dramatically in a short space of time.
Some people pay for all their spending on a credit card, for example to earn cashback. This is useful but letting the balance get too high against the limit will not experience the full benefit.
Avoid applying for too much credit at once
When the financial situation takes a sudden turn for the worst, such as losing a job just before Christmas, it’s easy to become too reliant on credit. Different loans, cards, motor finance and other services look at different things. Some look at past credit, others are more concerned with your ability to pay now. There is one thing that they all have in common though. Anybody applying for a lot of credit in a short space of time will raise a red flag. It suggests that you need a lot of credit and therefore likely at high risk of a default. This may not be true, but that is how each application will be perceived.
Instead, try to apply only for what you need at any given time unless you have no other choice. Let a few months pass after applying for one type of credit before applying for another.
Always use eligibility checks before applying
Every application for new credit will have a small but negative impact on your credit score. That cannot be avoided. In most cases, it’s nothing to worry about and just part and parcel of the credit application process. Even people with a superb credit score will have a temporary negative impact every time they apply for a loan or a credit card.
To get around this, most credit card and loan providers allow you to get a quick decision without going through the full process without impacting your score. Called an “eligibility check” or a “soft application”, they allow you to test the water to determine the likelihood of a successful outcome. The advantage to the eligibility check is that it will not show up on your record as a full application and therefore will not impact your credit score. You’ll also know whether your application will be approved.
Close unused cards and accounts
As stated in an earlier point, applying for too much credit at once negatively impacts your credit score. Similarly, having too much credit open – even if not being used – will also have a negative impact on your score. Available credit implies to the agencies that although it’s not presently being used, you may need and use it again in the future.
People who opened multiple credit cards for balance transfers in the last ten years may have benefited at the time from the 0% interest, but in some cases having so many cards to switch and change did some people more harm than good. Even if this was you, you should now consider closing some cards. Streamline your credit for maximum positive impact and limiting the negative impacts. When considering applying for more credit, the application will look favourably on you.