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“How much will your credit score go up and down if…?” is the most common question asked. There are three credit reference agencies which keep your credit record that lenders access to calculate your credit score.

At the time of borrowing, your credit score plays a paramount role in availing of affordable interest rates. If you have already stuck with a poor credit rating, you will likely be more tempted to find a way to boost it.

Experian provides assistance to boost your credit points. Still, it may not be very helpful because each borrower has a different scenario, so these pieces of advice will not work for all of you.

Put simply, if you already have two defaults, the effect of another fresh default will not be as bad as you may imagine, and if one of your defaults disappears after some time, your points will not go up much because two defaults still exist.

One of the main concerns at the time of borrowing is if you will get a loan at affordable interest rates. It largely depends on how a lender assesses your credit history. They have their own formulas and ways of examining.

The effect of credit utilisation on your credit score

Credit utilisation shows how much of the available credit limit you have consumed. The lower the utilisation ratio, the better it is. If you have a credit card with a limit of £5,000 and you have a balance up to £1,000, the utilisation ratio is 20%.

If your credit utilization ratio is up to 30%You will gain 90 points.
If it is lower than 30%You will score additional 60 points.
If it is above 50%You will lose more than 30 to 40 points.
If you have charged too much on your credit card, say more than 75%You will lose additional 50 points.

Another point to remember:

You should try to keep the credit utilisation ratio up to 30% to get the best score. However, you must pay off the balance before your credit card provider reports it to credit reference agencies.

For instance, if you pay off the balance on the 15th of every month and your credit provider reports your utilisation on the 10th of every month, your credit score will dip. If a lender checks your credit report, they will not offer competitive interest rates, even if you have already paid off the balance.

A 30-point drop matters

It may not seem like much, but it can throw you into a different tier. For instance, if your score is 960, you fit in a “good” range, so if your score drops by 30 points, it will not affect you much as you are still in the same range.

If your score is 730, you are in a “fair” range. After dropping it by 30 points, you will fall into a “bad” range. Dropping down to a different tier means attracting higher interest rates.

How to avoid a big drop

  • Keep credit utilisation ratio up to 30% or lower. Make a target not to consume more than 30% of the limit.
  • If you make a big purchase, you should try to pay it off even before the statement is generated or before the lender reports it to credit bureaus.
  • Even if you cannot pay off the balance immediately, you should still try to clear dues as soon as possible. Your points will go up after a month.

Important Note:

  • If you have a credit card with a low limit or have consumed too much of it, you can offset its impact with a high-income level. A lender will also compare your borrowing against your income.

The effects of missed payments and defaults

Missed payments and defaults can have a more damaging impact on your credit file. You may even be thrown into a “very poor” credit tier. It will not only increase the risk of high-interest rates but also the risk of rejection.

If you have missed paymentsYou will lose 80 points.
If you have a defaultYour credit points will dip by 350 points.
If you have a CCJYou will see a drop in your score by 250 points.

Other important points to note:

  • The size of the debt has no impact on the points you lose when you miss repayments or make a default. Whether there are direct lender installment loans for bad credit in the UK or long-term loans, you will lose the same score.
  • If your default is lower than two years, the damaging effect will not be much severe. The negative impact will drop to 250 points and 200 points if it is four years old.
  • Despite the entire debt settlement, you will not see a boost in your credit score. However, a CCJ will be removed from your credit report provided it is settled within a month after it arises.
  • Even if you have got to pay down, for example, loans for the unemployed with bad credit in weekly instalments, you will see no improvement in your credit score.

Damaging effects on deals you get

  • While reputed lenders will not find it worth lending you money, high-cost lenders may not even fight shy of approving big loans. The falling risk to get into the depth of a debt spiral is too high.
  • You will unlikely get the best balance transfer deals even if the defaults and missed payments are old and you have settled the whole debt.
  • Some mortgage lenders will be reluctant to approve your application, and if they do so, interest rates will be higher.

Things that do not affect credit score

Here are the surprising things that do not affect your credit score:

  • Checking your credit report multiple times will not pull your points. It does not leave footprints on it.
  • Paying off your defaulted debt will not boost your credit score, but it can prevent you from having a CCJ issued, which can have a damaging impact on your credit file for another six years.
  • Someone else living at your address has bad credit. Unless you are financially linked to that person, like in the case of a joint mortgage, numerous letters from lenders will not impact your credit rating.

The final comment

Maintaining a good credit score is not a cinch. If you have a poor credit score and want to improve it, contact a financial advisor or counsellor who can help with it. Follow the aforementioned suggestions to keep it in good condition.

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