Credit scores can be confusing things to understand. How can this number dictate how much I can get on a loan, or how much my repayments will be for a car? It can be baffling. However, understanding the factors that affect your credit score can make a significant impact on your financial well-being.
Whether you’re considering taking out a loan, applying for a credit card, or even renting a property, having a good credit score opens opportunities and ensures you’re in a strong position to manage your finances effectively. By delving into what influences your credit score, you can take proactive steps to improve it, ultimately leading to better financial stability and greater flexibility in your financial decisions.
Why knowing your credit score matters
Your credit score is a powerful tool that empowers you when it comes to managing your finances. By knowing your credit score, you can confidently apply for new lines of credit, such as loans or credit cards, knowing where you stand with lenders. A good credit score puts you in a favourable position, potentially granting you access to better interest rates and terms. For reference, a credit score is a three-digit number, spanning from 0 to as high as 999, and is categorised from ‘very poor’ to ‘excellent’. Though the specifics vary among agencies, the general ranges are:
- Excellent: 800-850 (or higher)
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
Additionally, understanding your credit score enables you to address any issues or discrepancies, ensuring your financial health remains robust. While scores can naturally adjust a few points down or up over time, as borrowing accounts close, new loans are taken out, and so on, seeing any big changes can be enough to make lenders take notice. Ultimately, a strong credit score opens doors to larger purchases and greater financial freedom down the line.
Read More: What is a credit score?
What affects my credit score positively?
- Borrowing only what you can afford: Responsible borrowing demonstrates financial prudence.
- Registering to vote at your address: This helps verify your identity and enhances your credit profile.
- Your repayment history: Consistently making timely payments reflects positively on your creditworthiness.
- Settling outstanding debts: Clearing debts demonstrates financial responsibility and can improve your credit score.
- Checking your reports to spot issues and outliers: Regularly reviewing your credit reports allows you to identify and rectify any errors promptly.
What affects my credit score negatively?
Now we’ve talked through the positives, let’s get to the negatives. These are the things you should try your best to avoid. It isn’t always possible – life happens after all – but doing what you can to reduce these from being a factor in your life should help keep your credit score healthy:
- Making late payments: Late payments can significantly impact your credit score and may incur penalties.
- Missing payments: Skipping payments can signal financial instability to lenders, which in turn makes it more difficult to take out a loan.
- Opening too many new credit lines too quickly: Rapidly acquiring new credit can raise concerns about your ability to manage debt responsibly.
- Filing for bankruptcy: Bankruptcy has a severe and lasting impact on your credit score.
- County Court Judgements (CCJs): CCJs can adversely affect your credit score and indicate unresolved financial issues.
- Being on a joint loan with people with poor financial histories: Associating with individuals with poor financial histories can negatively impact your creditworthiness, as the lower of the two scores is usually taken into account.
Read More: How long does bad credit last?
What doesn’t affect my credit score at all?
With all that said, there may be some things you could have sworn would impact your credit score that hasn’t been listed. Good news – if they’re any of the below, they actually don’t!
- Previous occupants at your home address: Your credit score is tied to your personal financial history, not that of previous occupants. This means you won’t inherit a shaky credit foundation from the people who were there before.
- Distant credit history notes over 6 years old: Credit history typically focuses on recent financial activity, with older notes having less influence. In fact, any closed account, debt, loan, or other detail over 6 years old that is no longer active, will not appear on your credit report after that time.
- Checking your credit score or report: Checking your credit score does not impact it in any way – in fact, it’s encouraged for monitoring purposes.
- Friends and family you live with: Unless you have a joint financial account, the credit scores of those you live with do not affect your own.
- Comparing credit offers with a soft search: Soft searches, such as price comparison checks, do not leave a footprint on your credit file and, therefore, do not impact your score. They are still visible, however.
Read More: How to improve your credit score
How do I check my credit score?
In the UK, several options exist for checking your credit score, including but not limited to Experian, Credit Karma, TransUnion, Equifax, and ClearScore. While some services may offer additional paid features, it’s important to note that you should not have to pay to see your credit score.
Also, remember that your credit score may vary slightly between different institutions due to variations in scoring models. Many banks now also provide insights into your credit score through their mobile apps, offering convenient access to your financial information.
Understanding what affects your credit score is essential for anyone looking to take control of their financial future. By knowing the factors influencing your creditworthiness, you can take proactive steps to improve your credit score and maintain healthy financial habits.
Whether it’s making timely payments, settling outstanding debts, or regularly monitoring your credit report for inaccuracies, small actions can have a significant impact on your financial well-being. Ultimately, a strong credit score opens doors to better financial opportunities and greater peace of mind.
