A credit score plays a paramount role when it comes to successful borrowing. It shows your financial commitment, and therefore, lenders do not miss a chance of checking your credit report. Whether or not a lender will sign off on your application depends on your credit score and income sources into the bargain.
The score keeps fluctuating over time owing to various reasons such as late payments, applying for new credits within a very short time and paying off your debt. The periodic monitoring of this score is extremely important.
If you look over your credit file every two months, you will see fluctuation in the score. Though you cannot know the exact formula for calculating it, you can figure out the cause for rapid fluctuation in it and what you can do to control it.
Things that cause fluctuation in your credit score
Here are the things that can cause fluctuation in your credit report:
- Negative impressions in your credit report
If your credit score is not fair, you will likely have negative impressions of it. It means late payment fees, foreclosure, insolvency, and the like. If these impressions stay in your credit file, you will likely struggle to maintain a good credit score. However, you will see improvement in your score as these impressions age.
Solution: pay off your debt on time
In order to avoid negative impressions on your credit report, you should ensure that you pay off your debt on time. You should mark the due dates on the calendar if you struggle to manage multiple debts. Create a budget so you can manage to stay on top of your expenses and build an emergency cushion, so you do not have to chase lenders to fund unforeseen expenses.
- Changes in your credit card balance
Plastic is more convenient than cash as there is no risk of being snitched. However, you need to be very careful about the use of your credit card. Note that your credit score accounts for a significant portion of credit card utilization.
The higher the credit utilization ratio, the poorer your credit score will be. The credit utilization ratio will be calculated based on the available balance of your credit card. For instance, if you have a credit card with a limit worth £1,000 and you have a balance worth £500, it means you have a 50% credit utilization ratio.
In order to maintain a good credit score, this ratio should not be aimed at more than 20 to 30%. You can quickly lower this utilization ratio by increasing your credit card balance.
Solution: try to maintain the ratio up to 30%
The credit utilization ratio must not be over and above 30%. It is better if it is between 20 and 30%. In order not to have this ratio beyond 30%, you should try to use your credit card only when you need it.
Emergencies are the best situations when you can use these cards. However, make sure that you pay off the balance within the interest-free period.
- Applying for a new loan
Of course, you will apply for a loan when you need money urgently. However, you need to be very careful about the timings of your loan application. If you apply for multiple loans within a very short period, your credit score will definitely go down.
For instance, if you have recently applied for a business startup loans for bad credit uk, you cannot apply for a new loan to fund your emergency. If you do so, your credit score will naturally go down whether or not the lender signs off on your application.
This is because hard inquiries will show up on your credit report every time you apply for new debt. This will prove to your lender that you cannot manage your expenses with your available income sources and hence keep applying for new loans. They will call your credibility and repaying capacity into question.
Solution: take on a new loan only when you can afford
You need to be very sensible while taking out a new loan. A rule of thumb says that you should borrow money only when it is extremely urgent.
If you can manage to meet your expenses from the available source of cash, it is not suggested to borrow money.
You should carefully analyze your repaying capacity. If you are not sure about it, you should drop the idea of applying for a new loan as otherwise this will worsen your financial condition.
- Paying off your debt
You may be surprised to know it, but it is true that paying off your debt can also be a certain cause for dropping your credit score. A credit score is calculated based on a tricky formula, and hence sometimes paying off your debt can have a negative impact on your credit score.
For instance, if you pay off only instalment loans, it will not give a boost to your credit score. This is because it will allow an interpretation that you can only manage a particular kind of debt. A lender would like to see whether you are able to see a wide range of debt.
You should have a favorable credit mix, and you must have the potential to pay off those different types of debts. Further, be careful while paying off the balance of your credit card balance. You may have a mix of credit cards.
Some of them may have a favorable utilization ratio, and the rest will likely have a less favorable utilization ratio. If you pay off the balance of the former cards, you will be left with those with less favorable utilization ratios, and as a result, your credit score will likely be hurt.
Solution: manage multiple credit cards smartly
If you have multiple credit cards, make sure that they all are with a favorable utilization ratio. If you find it hard to manage all of them, try to close a couple of them, but make sure that it does not increase your credit utilization ratio.
It is recommended to take on more than three credit cards and keep rotating their usage as this will avoid the suffering of a utilization ratio.
Tips for monitoring your credit score
Improving your credit score can be quite challenging if it is not up to scratch. This is why it is suggested to monitor your credit score from time to time. Here are some tips you can follow to take stock of your credit file from time to time:
- Get a copy of your credit report. You can get it free of cost. Make sure that you get it from all credit reference agencies.
- Use free services to know what is hurting your credit score.
- Try to monitor your credit score monthly by paying nominal fees.
The bottom line
Your credit card should be good whether you are taking out unsecured or secured personal loans UK.
There are various factors that can affect your borrowing ability. You should try to figure out how you can prevent your credit score from dwindling due to those factors.