What affects your credit score?

There are a number of factors that can have a positive or negative effect on your credit score. Knowing what these factors are can help you to maintain a good score. And, as your credit score affects your ability to obtain credit, it’s pretty handy to know!

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What is a credit score?

A credit score, or credit rating, is a number that indicates the likelihood of you repaying credit.

Lenders such as banks and credit card companies use your credit history to calculate your credit score, this shows them the level of risk in lending to you. Meaning the higher your credit score, the better your chances of being accepted for credit, at the best rates.

Your credit score affects your ability to be accepted for:

  • credit cards

  • loan products, including secured and unsecured loans

  • a mortgage

  • car financing

  • monthly payments for gas & electricity

  • mobile phone contracts

  • insurance monthly payments

  • property rentals

Depending on where you check your credit score, the scale may differ, a credit score provided by Experian will sit on a scale between 0 and 999, whereas Equifax scores are on a scale of 0-700 and TransUnion uses a scale of 0-710.

Your credit score isn’t set in stone, as your financial profile changes so does your credit score. This means you have the ability to improve your score if you know how to, but you can also damage your credit rating if you’re not careful.

What affects your credit score?

  1. Your payment history is the most important factor when calculating your credit score. Just one missed payment can have a negative impact. Lenders want reassurance you’ll pay back your debt in full and on time when considering your application for credit.

  2. The amount you already owe, in particular, your credit utilisation ratio. A credit utilisation ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. Meaning this ratio represents how much of your available credit you’re using and provides a snapshot of how reliant you are on credit. It’s seen negatively by lenders if you’re using more than 30% of your available credit.

  3. The length of your credit history including the age of your oldest credit account, the newest and the average age of all. Typically, the longer your credit history is (i.e. the more years you’ve held credit) the higher your score is likely to be.

  4. How diverse your credit profile is, also affects your score. So, having a mix of credit can have a positive impact on your credit score. Having a range of credit facilities such as a credit card, a mortgage or a student loan can provide lenders with an indication of how well you are able to manage credit products.

  5. How many credit accounts you have recently opened, including the number of hard credit checks that have been completed while you have been applying for credit. Having too many accounts or inquiries can be seen as an indicator of increased risk and as such has a negative affect on your credit score.

What has a negative impact on your credit score?

  • Missed payments - missing, or late, payments can be the most detrimental to your credit score. As was mentioned above, lenders review your payment history when determining the level of risk associated with lending to you.

  • High credit utilisation - using too much of your available credit can be seen as a red flag as it suggests that you’re dependent on credit.

  • Lots of applications - making lots of applications for credit in a short period of time can also have a negative impact. Each time a lender requests your credit report (which is done when making a lending decision), a hard inquiry is added to your credit report. Having multiple inquiries in a short period of time may suggest to lenders that you’re in a poor financial situation or that you are being declined for new credit. These inquiries stay on your report for two years too.

  • Defaults - foreclosure, bankruptcy, repossession, charge-offs and settled accounts can all show on your credit report and they can damage your credit for years, even a decade.

You can improve your credit score?

Check out our handy guide to Improving your credit score

Looking for a credit card?

Finding a credit card through Monva is easy and because we can show you your eligibility before applying, you can apply with confidence.

Whether you’re looking for a balance transfer credit card, a purchases credit card or a credit card for bad credit, Monva will be able to help you find the right card for you.

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Tags: Credit Cards, Your Money