Many people overlook the impact a credit score can have on your financial life, until it comes to borrowing money! Its commonly assumed having never borrowed before is a good thing, but it could leave you with a bad credit score due to no previous evidence of borrowing. Building credit and managing your credit properly is the best way to improve your credit score. But what are the benefits of having a good credit score? You can be more attractive to lenders, have more finance opportunities and get lower interest rates on loans! Let’s look at each in more detail and see how better credit can influence your ability to borrow.
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What is a credit score?
A credit score is a number which indicates how likely you are to pay back your future loans, based on your previous history of borrowing. This information is held by verified credit reference agencies and in the UK, they are TransUnion, Experian, and Equifax. Each use their own scoring system and your score may differ with each agency. A higher credit score can make you more attractive to lenders, as based on your history, you show evidence of paying on time and handling credit effectively. A credit check may be performed by a car finance company, a mortgage lender, mobile phone provider, credit card company when you apply for credit or a loan.
Why is good credit better?
There are a number of ways in which good credit score can help your financial life. Having a low score can make it harder for lenders to accept you and can make borrowing more expensive. If you’re worried about your chances of approval, it can be worth increasing your credit score first to help reap the benefits of good credit.
Lower cost of borrowing.
When you borrow money from a car finance lender or mortgage provider, they usually put interest on your deal to make money. The cost of borrowing can be dependent on a few factors but one of the biggest is your credit score. People with better credit are a lower risk to lend to and get rewarded with lower interest rates. This helps to make finance cheaper and ultimately get you a better deal.
Easier to get approved.
You can find it easier to get a finance approval when you have better credit as you are less of a risk. Lenders use credit checks to see how good you are at paying back other loans on time and in full. A good credit score indicates you can do this correctly and helps lenders to make a positive prediction about your future finances too. This can make it easier for lenders to decide to offer you finance and gives you more options.
Better credit terms.
When you apply for a credit card, you will be given a max credit limit based on your credit score. You can get access to higher credit limits when you have better credit as you can be trusted to stay within the limit. A great way to help boost your credit score is to only use around 30% of your available limit at once and work to pay it off.
More negotiation power.
If you’re shopping round for loans or credit, you may be looking for the lowest interest rate possible. When you approach the lender with a better credit score, they can be away that more lenders may want to offer you finance. It can give you more negotiation power as you have more choice and could ultimately have the lender battling for your business.