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If you’ve applied for credit before and expect to apply for more in the future, it’s important to understand what affects your credit score.
A credit score is a three or four-digit number that represents how well you’ve managed borrowing in the past. Your credit score is based on data from your credit report.
By understanding what influences your credit score (both the good and the bad), you can take steps to maintain or improve your credit score, while avoiding actions that will cause it harm.
What affects your credit score?
Your credit score is influenced by a number of factors, including your history of making repayments to your credit accounts and how much of your available credit you’re using.
Keep in mind that you don’t have one credit score. The three credit reference agencies in the UK have their own methods of working out your score and could have different data about you. This means it will probably be a little different depending on where you look.
But because a credit score is a reflection of your credit history, including how well you’ve managed mortgages, personal loans and credit cards, there are broad rules about what can affect it.
This is the case regardless of who you’re checking your credit score with. Here’s what can influence your credit score – both the good and the bad.
What can affect your credit score positively
Generally, actions that help to show you’re a reliable borrower and that you are who you say you are can help you to build a good credit score. These include:
1. Making repayments on time
Arrears and missed payments will bring down your credit score, so making your repayments on time is the best way to maintain your score.
2. Registering to vote
Being on the electoral roll helps financial firms to confirm your identity and current address. This is important, because firms want to stop fraud and identity theft. Firms will usually be more confident lending money to someone if their identity can be easily verified.
3. Keeping and maintaining older accounts
The average age of your accounts can affect your credit score. If you’ve successfully managed a number of credit accounts over a long period of time, this can be good for your credit score.
4. Keeping your balances low
If the balances on your credit accounts are low and you’re staying well within your agreed credit limits, this helps to show that you’re in a good financial position and managing your money well.
5. Keeping your overall credit utilisation low
Connected to the point above, credit utilisation means how much of your available credit you’re using, across all of your revolving credit accounts. Revolving credit refers to types of credit that don’t have a set term or end date, for example credit cards.
Using a smaller amount of your available credit could boost your credit score, because it shows firms that you’re a responsible borrower and that you don’t need to rely on credit.
You can work out your credit utilisation ratio by adding up the balances on your revolving credit accounts, along with your credit limits. You then divide your overall balance by your overall credit limit and multiply it by 100, which gives the ratio as a percentage.
Here’s an example if you have two credit cards:
- The first card’s balance is £400 with a credit limit of £1,200.
- The other card’s balance is £900 with a credit limit of £4,500.
- £400 + £900 gives a total balance of £1,300, while £1,200 + £4,500 gives a total credit limit of £5,700.
- £1,300 divided by £5,700 is 0.23 and when multiplying that by 100 you get a credit utilisation ratio of 23%.
Experts agree that you should aim to keep your overall credit utilisation below 25%.
» MORE How do credit cards work?
6. Correcting mistakes on your credit report
It’s important to check your credit report for errors and mistakes, because they can harm your credit score. These problems can include payments being recorded as missed or debts being listed on your report twice.
When you dispute and correct mistakes with the relevant credit reference agency, you may see your credit score improve.
Debts that you don’t recognise could also indicate that someone has applied for credit in your name, so it’s important to investigate anything that doesn’t look right.
7. Limiting new applications for credit
There are two types of credit check – soft and hard searches.
A soft check isn’t visible to other firms when they look at your report and doesn’t affect your credit score. If you check your eligibility before applying for a loan, lenders often do a soft search.
On the other hand, a hard search is visible to firms when they look at your report. Lenders usually do a hard search when you actually apply for credit.
A hard search shows that you’ve applied for credit and so lenders may see you as higher risk, especially if you make lots of applications in a short space of time.
For this reason, going for a longer time without applying for new credit could be good for your score.
What negatively affects your credit score?
Actions that could show financial firms that it’s risky to lend to you – or that you’re struggling financially – can harm your credit score. These include:
1. Making new applications for credit
While going for a longer time without applying for credit may be good for your score, whenever you make a new application for credit it can cause it to drop temporarily – whether you’re approved or not.
What’s more, making a number of applications for credit over a short time could further harm your score. This is because it shows lenders that you may be relying on credit too much.
Getting rejected for credit doesn’t directly bring down your score, but because your application will be recorded as a hard search, it can affect it in this way.
2. Arrears and missed payments
If you miss a payment you’ll fall into arrears, which damages your credit score. Missed or late payments are recorded in your credit report and reduce the chances of a lender approving your application for new credit.
3. Low credit limits
A lower credit limit doesn’t give you much wriggle room when you need to spend larger amounts. If your balance approaches your credit limit, it can make you seem like you’re struggling financially. Lower credit limits also lead to a higher credit utilisation ratio. All of this can decrease your credit score.
The sweet spot is a credit limit that gives you the room to spend what you need without it seeming like you’re financially stretched.
4. High balances
High balances can knock your score, because they could suggest to lenders that you’re financially stretched. With credit cards, it’s good practice to pay off the full balance each month to avoid debt accruing and paying costly interest.
You should be able to set up a direct debit with your card provider to pay off the full balance on the same day each month.
5. High credit utilisation
A high credit utilisation ratio can bring down your credit score.
Using a larger amount of your available credit can harm your score because it shows firms that you may be over reliant on credit.
Generally, experts agree that you should keep your overall credit utilisation below 25%.
6. Account defaults
A default is when a firm closes your account after a prolonged period of missed payments. Before a firm defaults your account, they have to give you a default notice, giving you the chance to bring your account up to date.
Defaults bring down your credit score, because they show lenders that you haven’t met your credit obligations in the past.
7. Bankruptcy, CCJs and IVAs
Your credit score will be harmed if you have declared bankruptcy, have a County Court Judgment (CCJ) against you, or an Individual Voluntary Agreement (IVA).
These can greatly increase the chances of firms rejecting your application for credit because you haven’t kept up with repayments in the past.
What affects your credit score the most?
Missed payments, account defaults and bankruptcy, CCJs and IVAs will affect your credit score the most. They can dramatically lower your score because they show firms you’ve had serious problems with paying back money in the past.
For this reason it’s important to make your payments on time and to get advice on dealing with your debts if you’re struggling financially.
Charities such as Citizens Advice, National Debtline and StepChange can provide free support if you’re struggling with debt.
Why is your credit score important?
Your credit score helps to show you how lenders may view an application for new credit.
Typically, a higher credit score means that your application is more likely to be accepted. It shows 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’s a risk you won’t be able to repay your debts based on your credit history. It may also mean you can borrow less, and at a higher rate of interest because you’re seen as a riskier person to lend to.
» MORE: How important is your credit score?
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