Having a good credit rating is important. It’s the first thing lenders look into when deciding to offer you a loan, and if you have a poor credit rating, you are less likely to receive approval.
There are ways that can help you improve your credit rating, but first things first, let’s take a look at the following that causes your credit rating to drop.
Late Payments
The main factor that often causes your credit rating to drop is due to constant late payments. This can negatively affect your credit rating, as it shows the lender you can’t be relied on to make payments on time.
Remember, paying your bills on time will help preserve your credit rating!
Missed Payments
If you miss a payment, this will be documented on your credit report which can have a negative effect on your credit rating.
If you miss multiple payments, your lender may feel inclined to put your account into default, which means the lender will ask you to pay back the debt sum in full instead of paying in monthly installments.
Having your account defaulted will have a bad effect on your credit rating, and can also jeopardise applying for loans in the future. When a lender checks your credit report, they will see the default and you are less likely to receive approval as the lender will believe that there’s a great risk of you not paying back.
Cancelled Credit Cards
When improving your credit rating, people tend to think that closing previous credit card accounts will help, when in fact it does the complete opposite. By closing credit card accounts, this can give the lender a bad impression, and possibly damage your credit rating.
Plus, an important factor that determines your credit rating is the length of your credit history, and cancelling old credit cards can also cause a poor credit rating.
Gambling
You’re probably wondering, “What has gambling got to do with my credit rating?”
Well, here’s the truth:
Your gambling habit can indeed result in a poor credit rating. If you are using say, a credit card as a payment method, you could potentially be putting your credit rating at risk.
Even someone who puts an innocent £10 a week on a football coupon, can rule themselves out from getting a loan or mortgage from many High street lenders.
Plus, if you’re gambling away your money that you would normally use to pay your bills and so on, you could end up missing a payment which will result in damaging your credit rating.
Debt to Income Ratio
Your debt to income ratio doesn’t necessarily affect your credit rating, but it does help lenders to find out if you are able to repay your debts. It can also help you to gain credit.
If your Debt to Income Ratio (DTI) is low, preferably lower than 30%, it shows the lenders that you make enough money to pay your debts.
However, if your DTI is 50% and above, lenders may limit your borrowing options. If your DTI ratio is high, it basically means that majority of your money is going towards paying off your debts, leaving you with little to put towards your spending or saving.
Remember: the lower your DTI ratio, the more borrowing options you will have available to you.
