Credit scores can often be a black hole of complexity, particularly for students. But understanding what steps to take can go a long way in improving your financial health.
As a student you’re probably new to the world of finance, have little experience in navigating its intricacies and, yet, are still responsible for the decisions you make. To help you overcome some of the challenges surrounding this, we’ve put together a list of five mistakes that you should be aware of when interacting with credit for perhaps the first time.
A credit score, or credit rating, is a number that attempts to determine the likelihood of a borrower to repay a debt. Credit reference agencies (CRAs) systemically review your credit history to establish a score that represents your risk to lenders. The higher the score, the greater the chance that you will be approved for a certain amount and at a better rate. These scores can often affect many aspects of your life from private student loans to getting a mobile phone plan. So what mistakes should you avoid to ensure that your credit score does not go down the drain?
1. Using credit to fund a lifestyle
Students arrive for freshers’ week excited and ready to begin their new life at uni. For many this can mean setting up a student credit card for the very first time. And while many banks make this a relatively easy process, students often don’t have the practice of managing a revolving line of credit. This can lead to problems of overspending and making purchases to fund a certain lifestyle.
In a study of 117,000 students conducted by ClearScore, it was shown that 42% of students had a credit card. Of this group, students had an average outstanding debt of 44% of their credit limit (10-15% over the industry recommended ratio). The study showed that students were using their cards to fund their lifestyle rather than using it for emergency or one-off cases. While this may not necessarily be a problem, you should always be aware of your spending habits especially when using credit.
2. Not checking your information
Having updated and correct information on your credit file can go a long way in maintaining and raising your score. As a student you may have recently turned voting age. You should make sure that you have registered on the electoral roll as not having your name there can negatively affect your score. This can be done online or by post.
You should also routinely check your credit profile to ensure that the information they have for you is correct. This could include your name, address and any other personal details. Having any outdated information can cause your score to lower. The three major credit bureaus are Experian, Equifax and TransUnion (formerly Callcredit) and you can find various services that offer free checks for these bureaus.
3. Not making your monthly payments on time
Making your monthly payments on time will be one of the most important factors in maintaining your credit score. This means that you should always make at least the minimum amount that is due each month. Lenders want to see a consistent history of paying back on time and will be more likely to lend to you at better rates if you can demonstrate this.
Obviously emergencies do arise so if you default on a payment, it’s imperative that you attempt to catch up as soon as possible to avoid a negative hit to your score. Repeated defaults could result in County Court Judgments and will stay on the Register of Judgments, Order and Fines for six years. This will have an adverse impact to your score.
4. Ignoring your debt-to-limit ratio
When you are approved for a line of credit such as a credit card, the issuer will let you know how much your monthly limit will be. While this number may come as a welcome surprise, it’s important to know that your credit score can be affected by the amount of credit you are using out of this total amount. This is called the debt-to-limit or utilisation ratio.
Lenders want to see that when you do have access to a certain amount of credit, you are able to show forbearance and avoid maxing out. Many institutions recommend that you keep your ratio to 30% or less each month. This means that if you have a monthly credit limit of £1000, at the time that your payment is due, you should try to keep your outstanding balance lower than £300 to have a more favourable impact to your credit score.
5. Making too many ‘hard’ credit pulls
When applying for credit, the lender will check with the CRAs to view your previous applications. While some of these checks are known as ‘soft’ pulls, meaning they do not leave a visible trace on your credit profile, other checks do.
A ‘hard’ credit pull is a visible check that is done by an institution for a credit related product. This could be a loan, credit card, mortgage or even mobile phone plan. Each request for data will put a temporary search on your profile for up to 12 months - whether or not your application is successful. Too many checks in a short period of time could negatively affect your score so it would be beneficial to limit the number of products you are applying for in a certain period of time.
Set yourself up for success
At the end of the day it’s important to remember that while you’re an individual and not simply a number, your credit score is an important part of your financial health. Because lenders are dealing with thousands of applications, they use this score as easy and efficient way to assess your creditworthiness. As a student you’re most likely new to the world of managing these types of financial products, so be sure to set up good habits now that will allow you to reap the benefits later on. Credit scoring is a long game so we hope these tips will lead you to success in the future!