Credit rating, as a concept, is not anything new; however, the algorithm that helps lenders calculate it shifts from year to year. This is largely a result of how the purchasing power of individuals changes in relation to how the economy evolves over time. Regardless of their reasons, most lenders will not disclose the exact formulas that they use to establish an individual’s credit score.
This having been said, financial experts have managed to analyse the credit ratings of thousands of individuals and have found that four elements seem to weigh more than all the others combined. These are the credit usage ratio, the number of applications sent, the repayment habits of the lender, and the overall debt that an individual has to pay in relation to his current income.
By looking at these factors, we can determine what habits have the biggest contribution when it comes to increasing one’s credit rating over time.
Use Your Credit Cards Sparingly and Try to Switch to Online Lending Platforms
Credit cards are now easier to get and use than ever. Unfortunately, paying for products and services using them can also be extremely damaging to your credit rating. This is because lenders will look at your credit usage ratio. This value is determined by looking at the total amount of credit that you have access to and then at how much you’ve used.
For example, if you have a credit card that has a £5,000 limit attached to it and you use it to pay for products and services that are worth £2,500, you will have used 50% of the credit that is available to you. Generally speaking, anything that goes over 30% may make the lenders believe that you are unable to properly manage your finances. The same happens if you use your credit cards too often. Paying using your credit cards monthly will lower your credit rating.
As a golden rule, only use your credit cards when you need to and try to pay them off as soon as possible. If, however, you have a hard time managing your income, the best course of action is to find an online lending platform that does not perform credit rating checks. You will be able to borrow small amounts of money from these websites without having the transactions show up on your permanent financial records.
Consolidate Your Debt as Soon as It Is Profitable
If you have several types of debt, you should consolidate it as soon as possible. This will not only improve your credit score by showing lenders that you have a smaller number of loans that you need to repay, but also make it easier for you to make the monthly payments on time.
Use Online Repayment Calculators
When you are looking to take out a loan, use the online calculators offered by lenders on their websites instead of sending loan requests to discover how much the monthly payments would be. If you send a large number of loan requests in a short amount of time (especially before you intend to take out a loan) the lenders will presume that you are unsure that you will be able to make the monthly repayments.
Create a Repayment Buffer
Although it may sound counterintuitive, it is usually better to have money in a savings account before taking out a loan. This is because you can use the money as a buffer in the eventuality that you are unable to make a monthly repayment on time.
If you do not have enough money for the buffer before taking out the loan, try to put a few hundred pounds aside as you make the repayments. Depositing £30-£50 in a savings account, each month, can make a world of difference if your income ever drops.
Overall, each of these tips will produce great results individually. However, using them together will ensure that your credit rating will constantly grow and that you will never have to worry about not being able to pay the money back.