If you’ve checked your credit score and you have been surprised at where you fall on the credit scale, you may be wondering what factors affect your score. There’s a huge mix of factors that affect your credit score and knowing what they are can help you to improve your credit. The guide below looks at how your credit score is calculated and what factors aren’t considered.
What is a credit score?
Your credit score is a prediction of how likely you are to pay back loans or finance. It uses information on your credit report and your past financial behaviours to make predictions about the future. A good credit score indicates you can be trusted to make payments on time, you have low levels of debt, and you don’t heavily rely on credit. Your credit score can affect your eligibility for car finance, mortgages, credit cards, mobile phone contracts, loans and more. Not only that but it can affect the interest rate you are offered on loans and lenders usually save the best deals for people with the top end credit scores.
When you apply for loans or credit, lenders will usually request to perform a credit check on you. This check enables them to see your full credit history and all the information listed on there. They then use the information to decide if they wish to offer you finance or not.
Which factors affect my credit score?
Your credit score can be calculated by the following factors. Depending on the credit reference agency you use, there may be more or less factors than the ones listed below which contribute to your credit score.
Your personal information.
Credit lenders need to know your personal information to help prevent any fraudulent applications and make sure the person they are lending to is eligible. Your credit report will host lots of information such as your full name, living address, salary, relationship status, living situation and more. Keeping all your information up to date is key to having a healthy credit file.
Payment history.
One of the biggest influences on your credit score is your ability to make payments on time. Keeping on top of all your finance payments and setting direct debits to ensure all payments are met can help to improve your credit score. It also shows future lenders you’re committed to good financial habits.
Credit usage.
The credit utilisation ratio is something which is noted by lenders. Your credit score is affected by how much of your available credit you’re using. Having high levels of debt can out lenders off because they may think you can’t afford any more credit. To help keep your score healthy, you should only use around 30% of your available credit limits. For example, if you have a credit card with a limit of £1,000, you should only use up to £300 at once and pay it off in full if you can.
A mix of credit.
Some people think having credit is a bad thing, but your credit score can actually be boosted by having a good mix of different types of credit. This doesn’t mean going out and applying for all different sorts of credit at once, instead it means you may have a mortgage, car finance, a credit card and a mobile phone contract at the same time but you’re able to manage these loans appropriately.
Credit searches.
If you’re hunting around for finance, lenders may want to perform a credit check on you. Your credit report will list all the applications you’ve made for credit and the outcome of each. Credit searches can either be soft or hard. A soft search doesn’t affect your credit rating and only gives lenders a peek into your credit history. Hard searches, on the other hand, will be listed on your credit file and multiple hard searches at once can negatively impact your credit score.
Public records.
Public records such as defaults, CCJ, and bankruptcies can all have a negative effect on your credit report. They stay on there for up to 6 years and impact your ability to borrow in the future. All are a result of missed payments and the situation spiralling to a point where you can’t pay your loans back.
What is not recorded on your credit file?
There are many myths surrounding what is recorded on your credit file but the below do not affect your credit score.
- Your income.
- Your employment status.
- Health records.
- Personal details such as race, religious beliefs or political views.
- Criminal records.
- Savings accounts.