What affects my credit score?
Credit Scores can be affected by a number of factors that give an insight into your creditworthiness. Although the most important factor is often payment history, there are a number of different aspects of your financial situation that can have an impact
Here are the eight key factors that affect your credit score.
Your payment history
Your payment history is the most important component in your credit score. Lenders prefer customers who can manage their existing debt or credit accounts and previous credit behaviour is used to forecast future behaviour. In addition, your payment history can flag up circumstances such as if you suddenly start repaying only the minimum credit card payment, which might indicate a potential financial crisis or change in circumstance.
Lenders are risk adverse and so will be more likely to decline customers with a worsening financial profile. Paying all your bills on time is likely to result in a good credit score, whereas skipping payments or making late payments will show on your file negatively.
How much you use credit
Anyone who has a limited credit history may find it hard to borrow money because the lender is not able to determine if the borrower is a good risk. In addition, those customers with frequent and multiple credit applications raise a red flag for lenders because they may be overburdened with too much debt and might struggle with any further credit. Handling credit responsibly will boost your score.
IVAs (individual voluntary arrangement) or any bankruptcy proceedings will create a poor credit score, as do County Court Judgements. Negative information can stay on your file for some time, however a more recent and improved situation can mitigate any adverse credit history.
The number of accounts you have
Borrowers with multiple credit accounts and loans are likely to have a lower credit score. Credit scoring models will look at the accounts that have large balances and it is more favourable to have accounts with more zero-balances than ones with a high credit balance.
Closing credit accounts
Closing a credit account reduces the total amount of credit you have available, this means that while you might previously have had a large available balance, reducing this may look like you are up to your maximum credit balance. The lenders call this your credit utilisation ratio. It can also affect your credit profile if the accounts you close happen to be the oldest on your credit file.
Your history of credit use
Past behaviour is usually an indicator of future behaviour and so lenders will always be interested in how you have used credit previously.
Hard credit searches
New credit applications create searches from lenders. These searches are known as hard searches. Too many hard inquiries could indicate you have a greater credit risk.
However, some credit scoring models factor in the probability that several searches in a short space of time could indicate that a customer could be searching for the best lending product available to them and so will generally treat multiple inquiries of the same kind as a single inquiry as long as they occur very close together.
The impact of hard inquiries on your credit score diminishes with time and disappears altogether after 12 months. Borrowing responsible will reduce the impact of many hard search negatively impacting your credit file.
What doesnt affect your score?
Not every financial transaction that we are party to goes on our credit file. Some things have no bearing at all and these include our income levels, any savings, investments or assets such as property. Credit reports only show credit products and how you manage them. Your credit score depends largely on whether you paid creditors on time and not at all on whether you’re sitting on a pile of wealth.
Lenders require borrowers to be 18 years old or over and if a lending term will continue into retirement then these products might be declined if you cannot prove income levels to cover debt repayments into that stage of your life.
Credit scores of friends and family at the same residence won’t affect yours, neither will living with or marrying someone who does a have a perfect credit score improve yours. Everyone’s credit score is separate and individual.
However, opening a joint account or co-signing a loan with your spouse could affect your report. Your file will show any person who you are financially linked with. Only if you have a financial connection with someone, could this relationship impact on your credit score. A financial connection includes:
- Joint credit applications
- Joint bank accounts with an overdraft facility
- Joint loans or mortgages
- If you have acted as a guarantor on a loan
Other financial commitments that do not appear on your credit file include some of your overheads and general bills such as your rent and council tax payments. While these currently don’t show up on any credit report more and more organisations are considering adding this data in the future.
Finally, checking your credit report does not affect your credit score. Checking your own report only shows up as a soft search and does not leave any mark on your report. This means you can keep your credit file under constant review and stay on top of your own information, keeping it accurate and up to date.
Credit Angel is a quick and uncomplicated way to keep on top of your credit score. Giving you the best chance of getting the best deals on credit cards and loans.