Welcome to our monthly Q&A session, where we shine the spotlight on some of the questions we get asked by our Noddlers.
This month, we’re taking a look at the whether coming into a lot of money has an effect on your credit score.
A financial windfall – such as coming into an inheritance – can sometimes be a game changer. Suddenly, money isn’t as much of an issue as it once was, or something you previously thought to be out of reach, such as buying a house, is possible. However, we often get asked whether having more money has an impact on your credit score and the answer is that it doesn’t. In fact, when it comes to credit scores, it doesn’t really matter how wealthy you are.
How credit scores are calculated
Your credit score doesn’t take into consideration any earnings or assets. It only reflects things like
- Financial Account Information, such as credit cards and loans
- Bank Account History
- Mobile Phone Accounts
- Public data, such as County Court Judgements
It’s all about your financial behaviour and how well you manage paying back credit. You could have £10 in savings or £10,000 but if you don’t pay back what you borrow on time and use a healthy amount of credit, your credit rating could be negatively impacted.
Does a financial windfall impact on anything at all when it comes to credit?
How much you earn, savings and other assets do play a role in a lender’s decision-making process when you apply for credit, as they impact affordability and your ability to pass ‘stress tests’.
Affordability is about whether or not you can afford to make repayments once you have covered the cost of everything else, such as bills and essentials like food. It’s basically designed to help stop situations where people take on more credit than they can afford and end up in debt.
A ‘stress test’ is part of affordability and asks the question ‘if something negative happened, such as losing your job, could you cope financially?’ So, if you’ve had a financial windfall, your affordability will likely improve, as lenders will see you have a financial safety net and additional funds to cover any costs you may have.
What to do if you have cash, but a poor score
Having a good credit score is just as important whether you’ve had a cash windfall or not, as it is one of the things that affects whether or not you’ll get approved for credit by a lender. Luckily, there are things you can do to improve your score. See our list of tips here.