January 22, 2024
Fees Free Mortgage Team

How To Build a Credit Score

January 22, 2024 - Fees Free Mortgage Team

How To Build a Credit Score

In a world where good credit can open doors to homes, cars, and more, having a solid grasp on what affects your score and how you can improve it is more important than ever. Whether you’re just starting out, looking to bolster your financial standing, or repairing past credit hiccups, understanding your credit score is the weapon you could be missing from your financial toolkit.

What Is a Credit Score?

While you’re looking at financial matters, you might wonder what a credit score is and why it seems to frequently pop up. Think of them as a passport for your finances. They’re essentially a number that lenders use to get an overview of your financial health – giving insights as to how good you are at managing money, especially when it comes to borrowing and repaying your debts.

How Is a Credit Score Calculated?

Figuring out how your credit score is calculated can seem tricky, but gets easier once you look at the key factors involved:

Payment History (35%)

Your repayment history plays the biggest role in shaping your credit score. It’s all about whether you’re paying your bills on time. This doesn’t just involve credit card bills or loan payments; even your utility bills count. Lenders take a good look at how timely you are with these payments when they work out your credit score. So, it’s really important to stay on top of your bills. Missing a payment can pull your score down, and keeping up with them can give it a boost.

Amounts Owed (30%)

Another big piece of the puzzle is the amount you owe in relation to your credit limits, or what’s known as your credit utilisation ratio. To give your score a lift, it’s important to keep the amounts you owe well below your total credit limit. This shows lenders that you’re not stretching your finances too thin. Managing this balance well can really help in keeping your credit score healthy.

Length of Credit History (15%)

Let’s talk about the length of your credit history. While it’s not as heavy-hitting as your repayment history or amount owed, it still matters. This part is all about how long you’ve been using credit, whether it’s just for a few months or over many years. A longer credit history can work in your favour because it gives lenders a clearer, long-term view of how you’ve handled your debt.

New Credit (10%)

When it comes to your credit score, how often you open new accounts can make a difference. Opening several new accounts in a short span or frequently applying for new credit might seem harmless, but it can actually affect your score. Lenders look at the number of new accounts you have and how often you’ve applied for credit. If there’s a lot of new activity in a short time, it might signal to lenders that you’re taking on too much too fast, which could raise concerns about your financial stability.

Types of Credit in Use (10%)

Your credit score also takes into account the types of credit you’re using. Having a variety of credit types can actually be beneficial! This can include a mix of credit cards, retail accounts, instalment loans, and even mortgage loans. A diverse mix shows lenders that you can handle different kinds of credit responsibly, which can give your credit score a nice little boost.

Why Does Having a Good Credit Score Matter?

Having a good credit score is crucial in managing your finances. It influences how lenders view your reliability as a borrower and can affect your access to credit, like loans and credit cards. A higher score can lead to better interest rates and terms, making borrowing more affordable.

Borrowing Power

Imagine if there was a VIP pass that could get you to the top of the borrowing list. Well, a good credit score can do just that. It not only increases your chances of getting your loan approved but it can also help you snag those lower interest rates. This means that when you’re looking for a mortgage, having a strong credit score backing you up could save you thousands over the years of interest. 

Mortgage and Renting

Whether you’re buying or renting, when you step out onto that financial stage, the spotlight will be shining on your credit score. Both your mortgage lender and landlord will use it to predict how reliably you’ll meet your payments. By having a good credit score, you can send your application to the top of the pile, meaning you’ll be benefitting from those better terms and even a reduced need for a large deposit.

Utility Services

You might not realise it but your utility companies also take a peek at your credit score. Whether it’s electricity, gas, or even your phone plan, they’ll take your credit score into consideration. By setting your sights on a higher score, you could skip the deposit or put yourself forward for those better payment plans.

Insurance Rates

Yep, even insurance companies are in on it. Many insurers use a credit-based insurance score to set premiums for auto and homeowners policies. This means that your credit score, whether high or low, can affect your insurance rates. Therefore, by aiming for a better score, you can benefit in other areas like savings on your monthly bills, meaning you can keep that extra bit of cash in your pocket.

How To Build Your Credit Score

If you’re just starting out on your credit journey, then knowing where to begin can seem daunting. However, we’ve all been there, and luckily for you building a credit score from the ground up is totally doable. Just like building your dream house, it takes time, effort, and the right tools, but the end result is well worth it.

Opening a Bank Account

Starting with a bank account is the first step you take to lay your financial foundations. By setting up a bank account, you’re establishing a relationship with a financial institution of your choice. This relationship can be beneficial when you start applying for credit, as it demonstrates to lenders that you can handle money responsibly.

Starter and Secured Credit Cards

Once you’ve set up your bank account, you can enter the world of credit. Both starter and secured credit cards are perfect if you’re a beginner, as they usually have a low credit limit. For secured cards, you can deposit an amount which becomes your credit limit. By doing so, you can reduce your lender’s risk, meaning it’ll be easier for you to get their seal of approval. 

Start by using these cards for small purchases and make sure you pay off the balance each month. By keeping up with responsible usage, you can send positive signals to lenders, gradually building your credit profile.

Responsible Credit Usage

While it’s tempting to go on a spending spree with your credit card in hand, it’s important to use it sparingly. Start by using a small portion of your available credit, ideally less than 30%, and pay it off in full each month. Remember, late payments can negatively impact your score, so by setting automated payments or reminders, you can make sure you never miss a due date. This shows lenders that you’re not only a reliable borrower but that you’re also cautious with your credit, setting the stage for a strong credit score.

Credit-Builder Loans

Credit-builder loans are specifically designed to help you build a positive credit history. But, how do they differ from a traditional loan? Well, instead of getting the loan amount up front, you’ll make fixed payments to the lender, and at the end of the loan term you’ll receive the total loan amount. If you’re starting at the bottom of the credit score ladder, then these loans are a great way for you to prove your trustworthiness without giving into the temptation of spending borrowed funds. 

Credit Monitoring

Once you’ve set up your credit score, your job isn’t quite finished. The key to building your credit score is to regularly review your credit report. This helps you to track your progress, and spot any errors or signs of fraudulent activities early. Luckily for you, you don’t have to do this alone. You’re entitled to a free report from each of the major credit bureaus once a year, so it’s important to take advantage of this to stay on top of your status. 

Build Your Credit Score With Fees Free Mortgages

Whether you’re at the starting line of building your credit or further along the path looking to enhance your score, achieving and maintaining a healthy credit score is an ongoing commitment. It’s about making smart choices, being consistent, and most importantly, having the right support to guide you. At Fees Free Mortgages, we’re more than just advisors, we’re your partners in building your strong financial foundation. 

We understand that everyone’s financial journey is unique, and there’s not a one-size-fits-all solution when it comes to a credit score. That’s why at Fees Free Mortgages, we take the time to understand your specific goals and challenges. We provide bespoke guidance to help you navigate your homeownership journey, whether it’s making sense of your credit report, advising on debt management, or helping you understand the financial habits that influence your score. 

But, improving your credit score doesn’t just end when you reach a certain number. Just as life changes, so do your credit needs. Which is why we’re here to offer ongoing support and adapt our advice as your financial situation evolves. From monitoring your progress to adjusting strategies in response to life’s milestones, we’re committed to being your steady guide. 

If you’re ready to take proactive steps towards acquiring your dream home, then why not partner with our guiding hand? When you reach out to Fees Free Mortgages, you’ll be equipped with the tools, knowledge, and support you need to climb your way to the top of the property ladder.

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