What you ought to know about Credit Ratings in the UK

A credit score is a three-digit numerical value that enables lenders and financial institutions to gauge you as a financial risk and your eligibility for a loan. Your credit rating, however, is essentially a grade and conveys your creditworthiness. If you are looking for a quick guide to credit, this may be for you. 

Credit Rating in the UK

This refers to a system where financial institutions determine the creditworthiness of anyone who wants to borrow a loan. The three leading Credit Reference Agencies (CRA) are TransUnion, Equifax, and Experian. Equifax and Experian use the FICO scoring method.

What are Credit Reports?

A credit report is known to store accumulated data of your entire credit history. Credit reports contain the following

  • Personal details
  • Credit searches
  • Due payments
  • Missed out or delayed payments
  • Financial information
  • Information on the borrower on public registers

How does Credit Rating help Businesses?

Credit ratings carry a multitude of advantages. Here are a few: 

Assurance 

If the borrower has a substantial credit rating, the lenders can be sure that the money they lend is in safe hands. A high credit rating is an indication of the borrower’s punctuality and ability to repay the loan they borrow. 

Saves time

With tons of applicants in the UK, it is not practical to spend too much time evaluating each borrower’s financial patterns. Credit ratings make this process easy. Since external agencies who specialize in this review their credit records, lenders feel safe and comfortable about accepting loan applications. 

Easy to Understand

The credit rating system is easy to understand for just about everyone, which, of course, makes it an appealing system to follow. 

Affects your Investment Decision

As mentioned, credit ratings give lenders an idea of the borrower’s creditworthiness and profile, making it easy to decide who gets a loan and who doesn’t in a very short period. 

What is the importance of Credit Ratings?

Both credit scores and credit ratings are used to evaluate your creditworthiness. While credit scores are numbers that different CRAs use and credit ratings are a grade, they both ultimately tell the lender if you are a financial risk or not. 

If you have an excellent credit history, you should have no problem securing the best deals on loans at the most reasonable interest rates. However, if you find yourself on the other end of the credit score scale, you will have to figure out how to build credit. Lenders consider credit ratings to decide whether or not to sanction loans or credit cards. However, they can also use this for other investments like a vehicle, mortgage, utility expenses, and so forth. 

There are different types of credit for different purposes. Considering the demand for all the different types of credit, lenders need to follow a credit rating system to sanction loans to eligible applicants. 

How do you improve your Credit Rating and Scores?

As you know by now, you need to boost your credit rating and score if you want the best offers on loans and credit. High credit scores and ratings come with a myriad of benefits including: 

  • Reduced Interest Rates
  • Higher Credit Limit
  • Additional benefits

There are a few things you can do to improve your credit score: 

Get rid of unused accounts

If you happen to have a lot of unused accounts, the lender may assume that you are unable to handle large amounts of money and timely repayments and reject your loan application.

Limit your credit card applications

Applying for credit or loans frequently within a short period can backfire. It can cause lenders to believe you are desperate for a loan, which will not reflect well on your credit score. Be sure to reduce the number of times you apply for credit. 

Borrow loans that you can afford to repay

This should be understood but many borrowers do not do this. They end up borrowing too much and end up with debt. Be sure to borrow loans that you know you will be able to take care of on time. Otherwise, you will find yourself in large amounts of debt, causing you to lose money, and damage your credit score in the process. Make sure you avoid the vicious cycle of debt clearance. 

Pay Frequently

As you may have guessed, you need to make frequent payments to chip away at the loan amount faster. Why? So that you avoid having to pay too much interest and primarily pay the principal loan amount. Also, making loan repayments well ahead of the deadline will show your lender that you have no problem handling your debt, which will boost your credit score. 

Avoid making minimum repayments

Here is another thing you should avoid doing. Making only minimum payments every month is a bad idea. Ideally, you should pay as much as possible to reduce the overall principal amount and other associated charges that come with the loan. 

Conclusion

If you are new to credit ratings and credit scores, this article should help you navigate the world of credit. Be sure to check your credit eligibility and reports before you apply for a loan. You should also make sure you apply for loans you think you really need, to avoid having to make too many repayments. 

Finally, do not hesitate to look up credit eligibility checkers, credit builder loans, low-interest loans, bad credit loans, etc, depending on your credit history. 

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