A credit score, a three-digit number maintained by all three credit reference agencies, is an acknowledgement of your past payment behaviour. A loan application approval is highly dependent on your credit score health. A high credit score, which suggests responsible payment behaviour in the past, helps you qualify for lower interest rates, and vice versa. Subpar credit history is never appreciated. Experts suggest ameliorating your credit score before applying for a loan.

Many subprime borrowers make an attempt to improve their credit scores, but their efforts go in vain. Confused people fail to address the real cause of the constant decline in their credit score. Some applicants do not bother to fix their impaired credit report due to easy accessibility to bad credit loans with guaranteed approval. Bear in mind that guaranteed approval is not a real thing. No responsible lender is ever in a position to make such outlandish claims. Any lender providing loans with guaranteed approval are fraudulent lender, called a loan shark too.

Do not forget that you will need a positive track of payments in the future at the time of buying a house and car. Start putting in efforts in that direction from now, as credit score improvement is not an overnight process.

Credit score myths that cost you more money

Myths about credit scores, despite widespread awareness by the FCA, are ubiquitous and constantly affecting the financial lives of people.

• Myth 1: carrying a balance is good for your credit score

Leaving a balance on your credit card will never build or improve your credit score, even if you have been making more than the minimum payment every month. Carrying an outstanding balance not only helps your credit card company to charge interest, but it also significantly drops your credit score.

Every month, credit card companies report balances to credit reference agencies. It is crucial that you have paid off the whole balance once and for all before they report it to protect your credit score from being harmed.

If it is not possible to align your payment date with your reporting date, ensure that the credit utilisation ratio is not above 30%. The lower, the better.

• Myth 2: Closing old credit cards will boost your credit points

Many credit card holders become tempted to close their old accounts after the settlement of credit card debt. They find it a good solution to avoid the temptation of using them and racking up debt once again. Further, it also precludes you from paying any fees that the credit card issuing company charges for maintenance.

Closing old credit card accounts will do more harm than good because this reduces your credit length, an important factor in determining your responsible financial behaviour. It also increases your credit utilisation ratio, which should not exceed 30%, implying that you rely on your credit card all the time to make ends meet.

• Myth 3: Your high income can offset the impact of your credit score

Many people are under the impression that they can access lower interest rates with high income. Lenders generally make the lending decision based on income because it determines borrowers’ future repayment capacity. Though it is true to some extent, it does not suggest integrity in your financial behaviour.

Just because your income is strong, it does not rule out your propensity of missing out on payments. They will peruse both your credit score and income, and they both play a different role in determining your application’s approval. Your high income does not prove that you are a less risky borrower, so it is impossible that it will offset the impact of your substandard credit score. You cannot escape high interest rates if your credit rating is not up to snuff.

• Myth 4: You need debt to build credit

It is assumed that you need to take out a loan to build credit. It is true, but to some extent. It does not have to be a credit-builder loan or any other instalment loan. Using a credit card responsibly itself can help build your credit history. Make sure that you pay off the balance in full to prove reliability.

• Myth 5: One late payment is not a big deal

Consistency is the key to building a positive credit score. Whether you take out a small emergency loan to be paid back at one shot or a personal loan to be paid down in fixed instalments, you should make payments on time.

Many borrowers believe that one late payment will not affect their credit score. Your lender will wait for 30 days to notify credit reference agencies of your missed payment. If you fail to clear your dues within the given timeframe, they will report it to credit bureaus.

You cannot escape accrued interest and late payment charges even though you clear the outstanding payment soon after. Chances are, next time you will find it a bit hard to keep up with payment. If you again fall behind on the payment schedule, not only will your debt accumulate, but your credit score will be ruined.

The 30-day window is only available for instalment loans. If you miss the payment of small emergency loans that are required to be discharged in one fell swoop. The debt will roll over. This will increase the total cost of the debt, thanks to late payment charges and accrued interest on the unpaid balance for the rollover period. Eventually, you will find yourself plunging into a deep abyss of debt.

Remember that on-time payments of instalment loans, not same-day loans, help build your credit score, but late or missed payments of both types of loans can take a toll on your credit score.

To wrap up

It is vital to build a good credit history. If you have a thin or poor credit history, you should start fixing it now. Identify the cause of running up debt and overdrafts. Create a budget to keep track of expenses to ensure that you remain on top of your budget.