Your credit score is one of the most critical factors in whether you can borrow money and how much interest you’ll have to pay. Knowing more about how your credit score is calculated will help you improve it where possible, though you may still need to consider specialist loans for bad credit.
Most lenders use a system called the FICO Score. This gives you a score between 300 and 850, with the points earned in these proportions:
- 35% is based on how often you’ve been late with past credit repayments or missed them entirely.
- 30% is based on how much money you already owe.
- 15% is based on how long your credit history goes back and how long you’ve had particular credit accounts.
- 10% is based on how many credit checks you’ve had in the past two years, usually from credit applications.
- 10% is based on how many different types of credit you have (generally, the more, the better.)
Some lenders use alternative scoring methods. These tend to work the same way but may emphasize different factors. For example, a system called VantageScore puts more weight on how much you owe and how much that is as a proportion of your total credit limit.
Remember that your credit score isn’t always the final word on whether your loan or credit card application is successful. It’s more of a guideline for you and lenders. Individual lenders will have their criteria for when and how they give credit and will usually consider other factors such as your income and employment status. They may also put different weights on the various factors that make up your score.
There’s no guaranteed way to improve your credit score, but the following steps should help:
1. Check Your Credit Report
Most of the major credit bureaus (which provide the data that leads to your score) let you check your credit report free of charge. Look out for any errors or omissions that could be hurting your score.
2. Keep Accounts Open
Don’t always rush to close a credit card or similar account you aren’t using. Keeping it open will maintain your credit history and boost the average time all your accounts have been open, which can improve your score. (Do closely monitor the unused account to minimize any fraud risk, though.)
3. Keep Up To Date On Payments
Make sure you make any existing credit payments on schedule as, over time, this will reduce the impact of any past late payments. Consider using Autopay or calendar reminder systems so you don’t accidentally miss a payment.
4. Pace Your Applications
Try not to make credit applications unless you have a good chance of success. If you get turned down, wait a while before applying elsewhere. Multiple applications in a short period can lower your score, so it’s easy to get into a vicious cycle of each failed application, making another rejection more likely.
5. Consider Specialist Loans
A company offering personal loans for bad credit could help in two ways. They may offer a loan when you can’t get credit elsewhere. In turn, if you can make the repayments regularly on a bad credit loan, you’ll build up your credit history and boost your score.