21 November 2019
It is vital to understand what affects a credit score, in both a positive and a negative way, so that you can take care of your own score as much as possible.
Below we’ve listed some of the most important factors to consider that can affect your credit score.
Your credit score is a three-digit number (although this can vary depending upon which Credit Reference Agency is providing the information), it’s based on the information contained within your credit report., and having a good credit score can be your ticket to buying your dream home, opening a business, as well as being able to access day-to-day services such as a mobile phone contract.
Payment history is arguably the most important factor in credit scoring, and even one missed scheduled credit-based repayment can have a negative impact on your credit score. Credit providers want to be sure that you will be able to repay your finance agreement in full and on time, when considering you for a new credit application.
The FICO® Score for each individual in the UK, the score used by most credit providers, states that payment history makes-up 35% of their credit score rating, indicating how vital payment history is as part of each person’s overall credit history.
When it comes to payment history, the best way to limit the negative impact it has on your credit score is to simply try to repay any bills you have on time, as well as making any outstanding repayments that you might not have made yet.
Your credit utilisation ratio is calculated by dividing the total revolving credit you are currently using, by all of your revolving credit limits. This ratio looks at how much of your available credit you're using and is especially useful for giving you a snapshot of how reliant you are on non-cash funds. Credit utilisation becomes a negative factor on your credit score when you are using more than 30% of your available credit, and your credit utilisation accounts for 30% of your FICO Score.
Another factor that can affect your credit score is your credit mix, which is another way of saying the diversity of your credit accounts, and this is one of the most common factors used to calculate your credit score. It is also one of the most overlooked by the general public. By maintaining and repaying on-time different credit account types, such as a personal loan, a mortgage and a credit card, this shows potential credit providers that you can manage different types of debt at the same time, while also giving a clearer image of your finances and ability to repay your debts.
While having a less diverse range of credit accounts won’t necessarily cause your scores to go down, the more types of credit you are able to manage and maintain the better. Your credit mix accounts for 10% of your FICO Score and could be an influential factor in helping you to achieve an even better score.
Each time a credit provider requests your credit reports for a lending decision, a ‘hard inquiry’ is recorded on your credit file. These inquiries stay on your file for up to two years after the fact and can cause your score to go down for a period of time. All lenders look at the number of hard inquiries, as a means to understand how much new credit you are requesting.
So, it’s important to remembers that too many of these hard inquiries in a short period of time can be a signal that you are in a poor financial situation or that you are being denied new credit elsewhere.
You can limit the impact hard inquiries have on your credit score by limiting the number of times you make an application for new credit; which will reduce the number of hard inquiries on your credit file.
Late or missed payments, foreclosures, collection accounts, and charge-offs are all examples of negative information that can appear in your credit file. Negative information typically indicates that you have defaulted on a credit agreement in the past and information like this can send red flags to providers looking to approve you for new credit.
Although the effect negative information has on your credit score depends on your overall credit profile, as well as what type of record it is. Negative credit information can linger on your record several years after the fact, so it is better to avoid any negative actions which can lead to a record being left on your credit file if you can.
These are just a few examples of some of the many different factors that can have an impact on your credit score, and some of these factors can be managed fairly easily so long as you remember to factor them in and deal with them as far as you possibly can. For more information on how you can aim to improve your credit score, you can read our blog on how to improve your credit score here.