What Might Affect Your Credit Score as a Young Adult?
Guest contributor Amy shares important information on what can affect your credit score and how to ensure you achieve and maintain a good rating. Her article contains plenty of useful resources if you need help with your finances.
Please keep in mind this article is based solely on personal experience and research. It is for general information only and does not constitute financial advice. You should always speak to a qualified professional for any sensitive financial advice.
Photo: Ksenia Chernaya – Pexels
What is a credit score & why does it matter?
Your credit score is an indicator of how reliable you are at borrowing and repaying money. Your score is based on your credit history: number of open accounts (including banks and credit cards, loans, utilities bills etc.), your total level of debt, repayment history, and other factors. It shows potential lenders how much of a risk it would be to lend you money. In the UK, these credit reports are compiled by Credit Reference Agencies’ (CRAs).
As a young adult, your credit score is an important factor that can impact your financial future. A good credit score can make it easier for you to get approved for loans, mortgages and credit cards, and can also help you secure lower interest rates on those financial products. On the other hand, a poor credit score means you are less likely to be accepted for a credit application, or that you could be offered a lower amount of credit, and be charged higher interest rates and fees.
There are several factors that can impact your credit score. Here are some of the most important ones:
One of the biggest factors that can impact your credit score is your payment history. Lenders want to see that you have a track record of making your payments on time, for example utilities and phone bills, credit cards, rent etc. If you consistently pay your bills late, or if you have any accounts that are in collections, it can negatively impact your credit score.
Credit utilisation is the level of credit you are using in comparison to the total amount of credit you have left. For example, if you have a credit card with a £1,000 limit, and you have a balance of £500, your credit utilisation would be 50%. It is generally recommended to keep your credit utilisation below 30% in order to maintain a good credit score.
Length of credit history
The longer you have been using credit, the more information lenders have about your credit habits. This can be a positive factor in your credit score, as it shows that you have a track record of using credit responsibly. If you have just started using a credit card, it will take time to build a credit history and improve your score.
Types of credit
The types of credit you have can also impact your credit score. For example, having a mix of different types of credit, such as a mortgage, a car loan, and a credit card, can be seen as a positive factor in your credit score.
Whenever you apply for credit, the lender will check your credit report. This is known as a credit inquiry. While a single credit inquiry is unlikely to have a significant impact on your credit score, multiple inquiries in a short period of time can be seen as a negative factor. This is because it can appear as though you are desperate for credit, which would be a red flag to lenders.
Ways To Improve Your Score
There are several things you can do to improve your credit score:
One of the most important actions is to make sure you pay all your bills on time. You can set up automatic payments such as Direct Debits or Standing Orders to ensure that you don’t miss any deadlines.
Additionally, try to keep your credit utilisation low by paying off your balances in full each month, or at least keeping your balances below 30% of your total credit limit.
Another thing you can do is to apply for credit responsibly. Only apply for credit when you truly need it, and be selective. Avoid applying for too many credit products in a short period of time, as this can result in multiple credit inquiries on your credit report.
Be aware of your credit report and credit score. Everyone is entitled to a free copy of a credit report from each of the major credit reference agencies: Equifax, Experian and TransUnion. It is worth checking all, as each company may use different information and formulae when calculating your score.
Check your credit report to make sure that all the data is accurate, e.g. your payments, open accounts, current and previous addresses. If you find any mistakes, dispute them with the credit reference agency as soon as possible.
Register to vote at your current address. Lenders use the electoral register to check who you are and where you live. (You can register even if you’re living back home with parents or in student accommodation).
Finally, try to manage credit responsibly by using it sparingly and paying off your balances in full each month. Not only will this cost you less in interest payments, it will also help you establish a good credit history, which can pay off in the long run when you apply for a mortgage, loan or credit.
When In Debt
As a young adult, it’s important to manage your debt carefully so that it doesn’t become a burden. There are many financial hurdles young people face, but managing them is key to avoid further problems. Here are a few tips for managing debt:
Make a budget
Knowing how much money you have coming in and going out each month can help you see where you can cut back on spending and allocate more money towards paying off your debt. There are many online resources on how to plan your budget.
Pay more than the minimum payment
When you only pay the minimum payment on your debt, you’ll end up paying more in the long run due to escalating interest. Try to clear your outstanding balance, or at least pay as much as you can each month to lower the total amount of interest you’ll pay.
Prioritise high-interest debt
If you have multiple debts, focus on paying off the ones with the highest interest rates first. This will save money in the long term.
If you have multiple debts with different interest rates, consolidation may be a good option. This involves taking out a new loan to pay off your existing debts, which can potentially lower your overall interest rate. For example an Individual Voluntary Arrangement (IVA) is a legal agreement with your creditors to pay back your debts over an agreed period of time. You can use this calculator to estimate how much an IVA could reduce your debt. However, we always recommend seeking independent professional advice to check whether this would be the right option for you.
Seek help if you’re having trouble
About the Author
Amy Jones is a freelance writer and enjoys writing about finance and ways to save money. She is particularly interested in learning more about property investing and debt management, and hopes to have her own portfolio of properties some day. Amy has worked with many businesses since graduating with her journalism degree at Manchester Metropolitan University in 2020, and she hopes to grow her writing career whilst guiding readers with the most up-to-date information possible.
Find out more:
What is in a credit report, who uses them & how to improve your rating