Your credit score (also known as credit rating) shows your creditworthiness. The higher the score, the better you as a borrower will look to potential lenders.
Your credit score is partly based on how you’ve managed your money in the past. Your credit history may include your total level of debt, repayment history, number of open accounts as well as other factors like if you’re on the electoral roll. Lenders use credit scores as part of the application process to determine how suitable you would be for a loan.
So, what can affect your credit score? Read on to find out.
Table of Contents
8 Factors Affecting Your Credit Score:
1. Your Credit History Over A Number of Years
While the amount of years you’ve had your accounts for aren’t the most important factors for determining your credit score, they can have an impact. Having a credit history over a long period of time shows lenders you’ve managed to sustain your loans and credit commitments reliably over time.
2. Payment History
Any late payments are considered when calculating your credit score. Overdue payments could suggest you’re struggling to manage your finances, which may have a negative knock-on effect when you next apply for credit.
If a late payment is recorded on your credit file, it will stay there for 6 years. If this happens, make sure you keep up with future payments. Over time you will see your credit score improve, making it easier to get approved for credit at better rates.
3. Hard Credit Searches
A credit search is when a lender checks your credit report as part of an application for loans or other forms of credit. The search can view late payments, bankruptcy, any CCJs (County Court Judgement) and other information.
A hard search often has a temporary impact on your credit report so it’s important to try and not apply for credit with several lenders at the same time as this will impact your score negatively. Whereas a soft search will not be visible to lenders, just the customers and won’t impact your score negatively.
4. Low Debt To Income Ratio
Your debt-to-income ratio is the amount of money you owe in relation to your monthly income.
For example, if your monthly salary is ÂŁ2,000 and your minimum loan payment is ÂŁ600 per month, it means that roughly 30% of what you earn per month goes towards paying off your debt. This is considered low. The higher your debt-to-income ratio is, the harder it may be for lenders to approve your application.
5. Creating and Sticking To A Budget
While budgeting doesn’t necessarily directly impact your credit score, it’s always a good idea to make and stick to a budget. Budgeting gives you a clear overview of your income and expenses. This in turn will help you understand if you can afford the monthly payments of any loans you take out.
6. Your Credit Utilisation
If possible, you should try to keep your credit utilisation below 30%. Using too much of your available credit can negatively affect your score. For example, if the limit on your account is ÂŁ1000, it would be ideal to avoid spending more than ÂŁ300 at any one time.
7. Mistakes In Your Credit Report
Even if you have a good credit score, there can be errors in your credit report.
It’s a good idea to check your credit report every few months as there could be errors in there that harm your score. Make sure all your information such as accounts and repayments data are accurate and up to date.
If you notice any inaccuracies or think you might be a victim of identity theft, contact your lender.
8. CCJs & Bankruptcy
There are many other factors that could affect your credit score for example having a CCJ (County Court Judgment) or having declared bankruptcy.
The more recent the CCJ, the greater the impact on your credit score.
If you are struggling to pay your debts, it may be better to negotiate with the creditors rather than ignoring them or declaring bankruptcy.
Bankruptcy can have a negative impact on all aspects of your financial life, including credit reports and future borrowing ability. Bankruptcy stays on record for six years but depending where you live, it may appear on your credit report for longer.
What’s The Best Way To Improve Your Credit Score?
The best way to improve your credit score is by keeping track of your credit cards and loans, only using what you can afford and making your repayments on time.
Conclusion
Your credit score is an important part of your financial health. A good credit score could lead to several benefits, including access to loans and credits at attractive interest rates.
We hope this article has helped you understand what can affect your credit score.
Disclaimer: Please note, we are not providing financial advice. Our blogs are written for informational purposes only.