Credit ratings are assessments of creditworthiness of individuals or countries. In the world of loans, they are used by lenders such as banks and other financial institutions to evaluate the risk of lending money – or extending credit – to a particular entity. In other words, credit ratings provide an opinion on the likelihood of timely repayment of debt obligations, based on a person or company’s history of managing their finances.
In Sweden, you can obtain your credit rating through various means. UC (Upplysningscentralen) is arguably the most widely used credit information agency in the country, and it has a sound reputation amongst Swedes. You can request a personal or business credit report and score directly from UC. The report will be a thorough evaluation of your credit history, outstanding debts, payment defaults, and other relevant financial information.
Though credit ratings are not the sole determiner of your loan terms and should not be the sole basis of the financial decisions that you make, they play a part in lending and investment. A higher credit rating typically implies lower borrowing costs and easier access to credit, while a lower credit rating can lead to higher borrowing costs and restricted access to credit. Therefore, if you are looking for ways to secure more favourable loan terms, you should ensure that you know as much as you can about credit ratings and how to improve yours.
Without further ado, below are 5 ways you can improve your credit rating to get better loan terms in the future.
- Pay your bills on time
The first and most important factors that lenders look at is how you have managed your finances in the past. A history of timely payment of your bills is crucial for a positive credit rating. This includes your credit card bills, any outstanding loans, utility bills, or rent. If you are worried about forgetting to make any of these payments, you should manually set up reminders or implement automatic payments to ensure you always pay your bills on time.
- Reduce credit card balances
If you regularly use credit cards to make payments, you should monitor your outstanding balances and aim to pay off your bills as quickly as you reasonably can. You should aim to keep your credit utilisation ratio – which is the amount of credit you are using compared to your credit limit – below 30%. This means that if your credit limit is 120 000 SEK, you should aim for your outstanding balance to never be above 36 000 SEK. This prevents your debt from becoming too overwhelming, and paying down your balances will be much more manageable. This can have a positive impact on your overall credit rating, when you show responsible use and management of your existing lines of credit.
- Minimise new credit applications
Aside from reducing your reliance of existing credit, you should also minimise applying for new lines of credit. Multiple lines of credit applied within a short period can be viewed as a sign of financial distress, which can lower lenders’ opinion of your creditworthiness. Limit any new credit applications to only when necessary to keep your credit report short.
- Avoid defaults and collections
If you already have loans in place, such as student and vehicle loans or a mortgage, you should avoid defaults and collections. These happen when you are unable to make your payments on time, and they will leave a permanent record in your credit report and harm your credit rating. Make every effort to identify and keep track of the outstanding debts you have, and if you cannot make payments on time, try to negotiate payment plans if possible.
- Maintain a stable financial profile
Finally, lenders often prefer borrowers with a stable financial profile, such as proof of regular income from employment and a stable residential history. While this cannot be fixed overnight, you should set your sights on avoiding frequent changes in your jobs and addresses if you plan on improving your credit rating over time. If you can, start by looking for full-time employment so that you can show creditors that you are committed to improving your overall financial situation. Once you have a job, stick to it and focus your efforts on increasing your income.
Improving your credit rating takes time and consistent effort, but it is not impossible. If you are looking for ways to achieve financial freedom – or financial flexibility – in 2024, now is the time to start making some positive changes. Develop responsible financial habits such as paying your bills on time and minimising credit applications. Maintain these habits over an extended period to improve your overall credit rating, and you will find yourself in a much better position to secure favourable loan terms. Or, who knows? By the time you have made these positive changes, you may find yourself not needing to take out loans at all anymore.
