A good credit score is vital to have lenders sign off on your loan application. Before exploring ways to boost your credit rating, it is crucial to comprehend what it is and how exactly it works. Every time you apply for a loan or a credit card, banks and direct lenders will look at your credit score to decide whether or not to accept your application.

A credit score is a three-digit number calculated by credit reference agencies that keep a record of your financial history, such as the loans you owe, the credit cards you have, etc. There are three credit bureaus in the UK – Experian, Equifax, and TransUnion – and each of them has its own method to calculate your score, but the higher the score, the higher the chances of being accepted.

Your credit score reflects the potential risk involved in loaning you. A bad credit rating is the result of missed payments and defaults in the past that explicitly throws light on your inability to manage debts. Even if you borrow a small sum of money, your lender will be sceptical about your repaying capacity. Chances are they will turn you down or charge very high interest rates, but there is more to it than meets the eye.

Consequences: a poor credit score results in

Here are the roadblocks you will likely experience due to a poor credit rating:

• The rejection rate is high

Your lender will assume you are a risky borrower. They will most likely turn down your application, especially if it is about long-term loans such as mortgages and instalment loans such as car loans and personal loans.

• Interest rate will be high

Some lenders might take on the risk by lending you, but they will offset the risk involved by charging high interest rates. Typically, emergency loans are approved quite quickly when your credit report is not up to scratch, but they are paid off in one go along with hefty interest payment.

• Difficulty consolidating loans

Consolidating is a good option to tackle multiple debts. They lower the risk of falling behind on payments, but you just need a good credit rating to avail yourself of this benefit. Some lenders offer debt consolidation loans with bad credit and no guarantor but charge very high interest rates.

• You will face difficulty renting a property

Many landlords will run a credit check to evaluate your payment history to know whether you can afford to make rental payments on time. They particularly emphasise a debt-to-income ratio to ensure it does not get in the way of rent payments.

• The size of security deposits will be high

Some lenders may ask you to arrange either collateral or a guarantor with a good credit rating to minimise their risk. For mortgages, the deposit size will be 20% to 40%, which is more than double the standard deposit size.

• Insurance premium will be high

Your car insurance premium will be expensive in case of a bad credit rating. However, it depends on the state where you are living because not all companies refer to your credit report to determine the size of the premium.

Ways to fix your bad credit file

A bad credit history may have a far-reaching impact on your borrowing. Not only will lenders restrict the borrowing amount, but they will charge high interest rates as well. You should take your credit score seriously especially for the sake of mortgages. Here are some steps to fix your credit report:

• Focus on your debt-to-income ratio

Borrowers usually are under the impression that they will qualify for attractive interest rates as they have been paying all debts on time. Well, the fact is that it is not the be-all and end-all factor to determine your affordability. Payment history makes up 35% of your credit score. How much debt you owe is a crucial factor in pursuing your affordability.

It is an excellent way to keep your score up to snuff by paying all your bills on time, but owing too much debt can raise eyebrows. Your lender will suspect your affordability. Too much debt complicates the approval process when you are borrowing a long-term loan.

The ideal debt-to-income ratio is not recommended more than 30%. However, having no debt at the time of applying for a new loan or a credit card will work to your advantage.

• Pay all your bills on time

Late payments can badly affect your credit rating. Auto-debt is the best method to avoid falling behind on payments. Make sure that your account has always sufficient balance to avoid overdraft fees.

If your lender does not have an auto-debit system, mark the due date on your calendar and set the reminder. Sometimes, all your loans have a common due date. Ask your lender if they can change the dates. Continue to keep up with payments unless you officially hear from them.

• Use a credit builder loan

A credit builder loan has been designed to help boost your credit score. They are similar to small personal loans that you pay down over a period of six months. Interest rates will certainly be higher because of your poor credit file, but on-time payments will help improve it. Apart from credit builder loans, the following ways can also be used to fix your credit score:

• You should become an authorised user of someone’s credit card. The payment history will appear on your credit report as well to help boost your credit rating.
• You can also apply for a secured credit card. The cash deposit becomes your credit limit, which you can use over time. Clearing your balance on time will contribute to your credit score.

Experian Boost also provides you with free ways to fix your credit history. It can use the payments of utility bills, rent, insurance and streaming services, which are not included by credit reference agencies, to help improve your credit score.

• Limit new credit inquiries

Credit inquiries are one of the factors to pull your credit points. When you apply for a new loan or a credit card, lenders will run hard inquiries that are recorded on your credit file. Each inquiry pulls at least five points from your score. The effect will be much more damaging when multiple inquiries appear within a short timeframe.

Lenders will consider you a borrower with a high default risk if your credit report reflects multiple inquiries. They will assume that you are bad at managing your finances and, therefore, rely on loans. Too many inquiries within a short timeframe reflect your desperation to borrow money.

When you apply for bad credit loans with guaranteed approval, make sure that you consider borrowing money from a lender who runs soft credit checks.

The final statement

A bad credit rating can make it harder for you to get approval for a loan at affordable rates. You should put in effort to improve it as soon as possible.