Credit scores play a big part in our financial lives. They signal how we have managed borrowing in the past and how likely we are to be approved for new credit.
Understanding what affects your credit score can help you improve your credit history. It could also boost your chances of being accepted for a range of financial products including loans, mortgages and credit cards.
From registering to vote to missing repayments, we explain some of the most common factors that affect your credit score.
What affects your credit score positively?
Generally, taking steps to prove you are a reliable borrower will help improve your credit score. These include:
- Paying off your debts on time: Borrowers that repay debts on time are looked at favourably by lenders and credit reference agencies. It shows that you are good at managing your money and that you have paid off what you have borrowed in the past.
- Registering to vote: Getting on the electoral roll helps lenders prove your identity and where you live. Credit applications may take longer to process or be rejected altogether if you are not registered to vote.
- Older accounts: Successfully managing several credit accounts over a long period of time is viewed favourably by credit reference agencies and could boost your credit score.
- Utility bills: Paying bills, such as water, energy and mobile phone contracts, are considered a form of credit. Putting utilities in your name and paying them on time could improve your credit score.
- Correcting mistakes on your credit report: Making sure the information on your credit report is accurate and up to date can help boost your credit score. Errors can make it harder for lenders to certify your identity and could delay your credit application or increase the chance of it being rejected.
- Low credit utilisation: Using a smaller amount of your available credit could improve your credit score because it shows lenders that you are a responsible borrower and don’t rely on credit. For example, if you borrow £2,000 and spend £1,000 of the loan, your credit utilisation will be 50%. It is recommended that you keep your credit utilisation below 30%.
What affects your credit score negatively?
- Setting up new accounts: Your credit score may lower temporarily when you open a new credit account, such as a loan or credit card. If you open new credit accounts too often, your credit score may worsen and take longer to recover. This is because making several credit applications in a short space of time suggests to lenders that you are struggling financially and may not be able to afford the repayments.
- Missing payments: Not paying your debts can damage your credit score. Missed or late payments are recorded in your credit report and reduce the chance of lenders approving applications for new credit.
- Using too much credit: Using up your credit limit, or going over it, may harm your credit score as it suggests to lenders you are struggling financially and rely too heavily on credit.
- Bankruptcy, CCJs and IVAs: Your credit score will be negatively impacted if you have declared bankruptcy, have a County Court Judgment (CCJ) against you, or an Individual Voluntary Agreement (IVA). These increase the chances of lenders rejecting your application because you haven’t kept up with repayments in the past.
What doesn’t affect your credit score?
- Checking your credit score: A common misconception is that you can lower your credit score by checking it. The truth is that you can check your credit score as many times as you need and it won’t affect your rating.
- Soft credit searches: Companies use soft credit checks or ‘quotation searches’ to take a provisional look at your credit history. Soft credit searches aren’t visible to lenders and don’t impact your credit score.
- Your address: Credit reference agencies only use your address to confirm your identity, so where you live should not affect your credit score.
- Who you live with: The credit scores of people you live with won’t affect your credit score. Companies will only check the credit histories of people who you are financially linked to through joint credit agreements, such as a joint mortgage or joint bank account.
Why does your credit score matter?
Credit scores are important because they affect almost every area of your financial life.
For example, if you are thinking about buying a home, you may need to apply for a mortgage. Most lenders will look at your credit history, among other factors, when deciding whether to approve your application.
Similarly, if you wanted to apply for car finance to buy a new vehicle, lenders will use your credit history to gauge if they should accept your application.
Typically, a higher credit score will boost your chances of being accepted for new credit. This will show lenders that you have a good track record of repaying your debts on time.
A higher credit score can also give you access to a wider range of financial products with lower interest rates and higher credit limits.
A lower credit score tends to reduce your chances of being accepted for new credit because it suggests to lenders that there is a risk you won’t be able to repay your debts based on your credit history.
How to check your credit score
You can check your credit score for free. Experian offers a free account with a monthly view of your credit score. But you have to upgrade and pay a monthly subscription for a more detailed credit report or to check your score more frequently.
Equifax offers a 30-day free introductory trial for you to view your credit score and credit history. After the introductory period ends you have to pay a monthly subscription. With TransUnion, you can access your credit score for free through Credit Karma.
Each credit reference agency has to offer a free statutory credit report by law. A statutory credit report doesn’t show your credit score. It gives a basic snapshot of your financial history, including credit agreements, missed or default payments and electoral roll details.
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