Most of us are probably aware of the term ‘credit history’, however not all of us are aware of how it can impact our finances and even our lives.
Your credit history is essentially a summarised record of your payment history on items of credit over the past 6+ years.
Often, credit reference agencies will assign a score to your file based on the information within it.
Someone who has consistently met payments and has had no issues will have a high credit score, whilst someone who has regularly missed payments or default on items of credit will have a low credit score.
But how does your credit score affect your life?
In day-to-day life, it doesn’t really affect you at all. However, when there comes a time that you need additional credit, this is when having a poor score will put you at a disadvantage.
Perhaps you’re looking to apply for a personal loan to fund a large purchase. Maybe you’re applying for a balance transfer credit card to consolidate debt. Perhaps you’re even looking to submit a mortgage application.
When a credit lender receives an application, they will carry out a series of checks to assess your eligibility. These could include affordability checks to make sure you could meet the repayments or ID checks to confirm your identity.
One check that almost all lenders will carry out is a credit check. This will allow them to see how you’ve dealt with credit in the past and make predictions regarding your future repayment habits.
Lenders want to lend to borrowers that will repay them. If you have a poor credit record, most lenders will reject your application.
A poor credit history can be the difference between being able to purchase a new car when your old one breaks down and not being able to. It could mean that you’re unable to consolidate your credit card debt with a loan. It could even stop you from buying the house that you’ve been saving up for.
This is why it’s important to look after your credit score. One way to do this is to regularly check it online.
Some credit reference agencies will charge you a monthly subscription fee, however companies like Noddle will allow you to check your credit score for free. With this service, you can also get monthly email alerts to remind you to check your file.
By routinely checking your file monthly you can identify how your credit file reacts to your payment history. For instance, you may notice that your credit score goes up when you close a few unused credit card accounts. You’ll probably notice that it goes down if you fail to make any repayments.
One other thing to look out for on your credit file is mistakes or fraudulent behaviour.
Very occasionally, lenders will make a mistake when reporting your repayment activity back to the credit reference agency. If this happens, it can put a blemish on your credit file that may affect your chances of getting credit in the future.
Quite often, it won’t be until someone has been turned down for an application that they find out that there is a mistake or fraud on their credit file.
By regularly checking your credit file you can nip any mistakes in the bud before they become a problem.
Another benefit of regularly checking your credit history is that it reduces the chances of being turned down for future credit applications.
For example, if you find out that your credit history is fair, you know that it might not be the best idea to apply for a low rate loan that requires a near-perfect credit score.
Equally, it can save you money. Perhaps your credit score is better than you expected – this may mean that you do in fact qualify for lower-rate finance.
Whilst your credit score may not affect the way you live your life day-to-day, it can have a significant bearing when it comes time to apply for credit in the future.
Remember, just because you think your credit score is perfect it may not be the case. Mistakes and fraud are a real threat – regularly check your score to ensure they do not affect you.