Understanding the Factors that Affect Your Credit Score

Credit ScoreYour credit score is a tool used by lenders when assessing any credit applications, such as a mortgage, credit card, or car finance. The number calculated reflects your financial history and represents the risk involved in lending money to the borrower.

With a higher credit rating, you are likely to be accepted to borrow larger sums at lower interest rates – and vice versa for bad credit scores. However, there is no universal rating as different credit reporting agencies calculate their own unique criteria, meaning it may differ depending on the service you use to check it.

But just what affects your credit score? Now that you understand how it works, we’ve put together this quick guide to explain the main factors that impact your rating.

History of Repayments

One of the most important factors for lenders – and something that can greatly impact your score – is your history of repayments. For example, do you always pay your bills on time? Or do you have a track record of late or missed payments?

Additionally, any bankruptcy, settlements or CCJs can harm your score – for example, a CCJ will stay on your file for six years. This could result in a lower rating and increase your risk in the eye of creditors. If you do find yourself in this situation, lenders like Ocean Finance offer bad credit loans which could help you rebuild your score.

The Amount you Owe

As well as repayment history, lenders also consider your total borrowings. This includes if you are over, on or near credit limits, as well as how much you owe overall.

Having a small balance can be better than owing nothing, as it shows creditors you can manage your borrowing. On the other hand, if you have accounts near the maximum borrowing limit, this could indicate financial instability and impact the kind of deals you can secure.

Recent and New Credit

In the long run, being accepted for new credit can be beneficial to your score – providing you repay on time and in full. However, a credit check (or hard inquiry) is required when an application is made and this leaves a temporary mark on your file.

Furthermore, if you make lots of applications within a short time, in addition to affecting your score, this could imply that you are struggling with your finances. Again, for a creditor, this could increase the risk.

Length of Credit File

Lastly, how long you have had your accounts can have an effect on your score. For example, if you have had your bank account for many years, have been at the same address for a long time, or held the same job, this can indicate stability. This can also show if you have a history of being responsible with credit and meeting repayments – both of which are vital to lenders.

How to Manage Bad Credit

creditGetting into financial difficulty is a fairly common problem with a great deal of stigma unfairly attached to it. Often, getting a poor credit score can be down to uncontrollable events in life (such as losing your job) as well as poor financial management, but it should never be the end of the road in terms of having healthy finances.

Given that bad credit can act as a roadblock to many things in life, such as opening a joint bank account or taking out a loan, it is worth looking at how to effectively manage it, so here are some methods.

Set a Budget

If you have a poor credit score, your main financial goal should be to prevent your debts spiralling out of control, and focusing on ways to rebuild your score. One of the most effective ways to do this is to create a budget, setting aside money for necessities each month, as well as putting money away to repay any outstanding debts as fast as possible.

This will help you to easily assess your outgoing expenses against your income, and better control your finances for the long term.

Bad Credit Bank Accounts

It is worth noting that there are also tools specifically designed for those with bad credit. One such tool is a bank account for bad credit, which allows those with a poor credit score to open a new account, which can then be used to rebuild their credit score.

These accounts are usually fee free, do not have an overdraft facility, and allow the user to access their money with a debit card. Sometimes known as basic bank accounts, most banks allow you to open one provided you have ID.

Use Credit Sparingly

If you have a bad credit score, then it is likely credit which got you into the predicament in the first place. That is why you should steer clear of taking out any further loans/credit unless absolutely necessary. This will allow you to focus on paying off your debts and becoming more stable financially.

Once you have done this, then the doors to better loans with more generous repayment terms will open once again, but you should still continue to use credit very sparingly, as it will always be expensive to pay back.

Bad credit need not be a ball and chain for your entire life. Sometimes just taking some simple steps towards effective management can help you rebuild your credit score and never look back.