Your 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.