What makes a good or excellent credit score? And what influences it? When it comes to applying for credit and understanding what information is actually involved in the final decision, things get a little complex.
Each credit reference agency (CRA) in the UK – Experian, Equifax and TransUnion (previously CallCredit) – uses its own credit scoring model to assign credit scores and as a result, there is no ‘perfect’ credit score.Not sure whether you will be granted a short-term loan because of your poor credit rating? Download our eBook for guidance on how to build and improve your credit score.
There are many misconceptions around what actually does affect someone’s credit score, some people even believe using social media will cause them problems applying for credit!
Despite each CRA using different scoring models, there are things that we can say – without a doubt – do not affect your credit score… and those that do.
Things that won’t affect your credit score:
1. Using social media
Using social media – be it Facebook, LinkedIn, Google+, Twitter or any other platform – will not affect your credit score.
2. Bank overdrafts
Current accounts will appear on your credit report as supplied by the company – but if your payment history contains late payments, defaults (when a lender closers your account due to missed payments) or an arrangement to pay status (when a lender agrees to take a reduced monthly payment than that originally set out in the credit agreement), for example, your credit score will be affected. Furthermore, if the bank enlists a collection agency to collect the outstanding balance, that will be listed on your credit report.
Provided you resolve your overdraft(s) in a timely manner, your credit score will not be affected.
3. Your income
You might assume that having a higher salary would influence your credit score – after all, if you have more money available each month, wouldn’t it be easier to repay your debts?
Fortunately, that’s not the case. The amount you earn does not indicate whether or not you will pay your debts – unlike your credit history. Your income can influence the amount of credit you can receive though.
4. Insurance inquiries
Any time an insurance company accesses your credit report, an inquiry will be added. However, insurance inquiries have no impact on your credit score or borrowing ability. Insurance inquiries are only shown on your personal credit report and that information is not provided to lenders.
5. Checking your own credit report
You’ll be pleased to know that checking your own credit report will not affect your credit score because it’s considered a soft inquiry, or soft check. Soft check is a type of inquiry carried out on your credit report that is not visible to prospective lenders and does not affect your credit score, or ability to get credit. So feel free to check your own credit report as often as you like.
6. Your age
How old you are will not influence your credit score but it will determine whether you can get credit.
Things that will affect your credit score:
1. Payment history
Your payment history is arguably the most important part in determining your overall credit score.
Bankruptcy, repossession, foreclosure (the sale of an asset used as collateral for the loan to regain outstanding monies) and tax liens (a legal claim by a government entity against a taxpayer’s assets for not paying tax debt) can all affect your credit score.
Of course, whilst there are numerous factors involved, maintaining and improving your credit score always comes down to making payments on time.
2. Level of debt/credit card utilisation rate
How much you owe overall and your credit card utilisation rate are also key factors used in determining your credit score. Credit utilisation is the ratio of your credit card balance to your credit limit. For example, if your credit balance is £100 and your credit limit is £1,000 – your credit utilisation for that credit card is 10%.
Carrying a lot of debt will inhibit your ability to get approved for new credit cards and loans, so it’s important that you pay off balances as quickly as possible to help raise your credit score.
Also, when it comes to credit cards, utilising too much of your credit could damage your credit score.
A good rule of thumb is to keep your credit cards below 30% of the total limit – in an ideal world, under 20%. However, if you want to improve your credit score you need to have a history of using money responsibly, so if you leave your cards unused with a 0% utilisation rate, that may have a negative effect on your credit score.
3. Length of credit history
In general, it’s better to have a longer credit history than a short one as a longer credit history will provide a more detailed overview of your credit management. Lenders look at your oldest accounts, newest accounts, the average age of all your accounts and whether they have been used recently.
It’s important to note that newer credit accounts on your credit report might affect your credit score as they won’t provide lenders with a good idea of how trustworthy you are yet.
4. Public records, county court judgements (CCJ) and individual voluntary arrangement (IVA)
CCJs and IVAs are on public record so become part of your credit report. They essentially show lenders that you have gone back on some form of financial agreement in the past.
CCJs are held on your credit report for up to six years, whereas an IVA will be removed three months after it ends.
5. Multiple credit inquiries
Applying for too many credit products in a short space of time can be seen as a sign of financial stress. Each time an application is made, the lender will check your credit report (known as a hard inquiry) before making a lending decision. Multiple hard inquiries can negatively affect your credit score, even if you don’t get approved for the credit card or loan.
Hard inquiries can stay on your credit report for up to two years, so instead of making multiple credit applications in one go, try to space them out over two or three months.
There is no ‘perfect’ credit score, but clearly, there are a bunch of things that affect it. If you want to improve your credit score, we’ve compiled a simple, free guide that you can download by clicking the button below.