What can impact your credit score (some of these you may not have realised)? - clearkey.co.uk
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What can impact your credit score (some of these you may not have realised)?

Your credit score is essentially your creditworthiness used by lenders to assess the risk of lending you money. Whether it is for a mortgage, loan or credit card, having a good credit score can significantly improve your chances of being accepted for the best deals and rates available. While any lender will be most interested in your repayment history, there are other factors that make up your credit score that lenders may also look at to decide if you are a good risk or not.

Spending on a credit card

Source – @pickawood

Knowing your credit score can be useful to understand how lenders use it to make decisions and what actions can impact your credit score. By understanding your credit score, you’ll get a good idea if you are likely to be accepted or rejected for credit. If your credit score is less than perfect, it can be even more crucial to know the factors impacting your score and why, so you can rectify them and improve your creditworthiness for those future purchases. In this article, we will look at the factors which can impact your credit score – and you might be surprised by some of them!

Payment History

This one is no secret. Your history of repaying debt and accounts has the most significant impact on your credit score. Understandably, lenders prefer customers who have a good record of paying their bills on time. This shows lenders you are responsible and can manage your finances sensibly. Your past behaviour is a good indicator of your potential future behaviour when it comes to your finances.

Lenders are risk-averse, so if your credit file shows you often miss or skip payments, you are more likely to get declined or not be offered a favourable rate. If this is you, make sure you get back on track and set up direct debits or regular payments to prevent any further damage to your score.

How much you use credit

Credit reference agencies use a credit utilisation ratio. With this, lenders look at how much of your available credit you are currently using. So, for example, if you have a credit card with a £5000 limit and have only used £1000 and pay this off regularly, it shows that you are living well within your credit means and are not stretched financially by other credit commitments. By contrast, if you had maxed out that credit card and were making just the minimum repayments, this shows that you have used all the credit available and may not be comfortably living within your means and, therefore, a greater risk for a new lender.

The length of your credit history

Lenders will look at how long you have held active accounts. Holding active and well-managed accounts for longer shows, you are a responsible borrower. Another lender has trusted you for a long time and will likely improve your credit score. On the other hand, having lots of new credit accounts could lower your credit score.
If you are considering closing down credit accounts, try and keep one that has been active longer open, as closing it could cause a dip in your credit score.

Negative factors

If you’ve gone through bankruptcy or have an IVA (individual voluntary arrangement), this will have negatively impact your credit score. As will county court judgements, defaults and arrears registered on your credit file. These factors can stay on your file for up to six years and are a red flag for lenders. However, if you have improved your financial standing over time, this could help reduce the impact of these.

The number of accounts you have

Borrowers with a high number of accounts and loans on their credit file are likely to have a lower credit score. This is because credit scoring looks at accounts with high balances, and your score will improve if you have a greater number of zero balance accounts rather than several high balance ones.

Hard credit searches

When you apply for new credit, these will appear as a hard search on your credit report. A high number of hard searches can make you appear to be a greater risk. The impact of these searches does reduce over time, and they disappear completely after twelve months. It is worth keeping in mind if you make several credit applications in a short time, lenders could view this in a negative light.

Being on the electoral roll

While being registered to vote on the electoral roll doesn’t directly hinder or help your credit score, it’s essential to make sure you are on it. This allows lenders to confirm your identity and check the details you have provided are accurate. Lenders are very keen to verify the identity of their customers to reduce the possibility of identity theft or fraud. By checking your details against the electoral roll, a lender will be more confident lending you money. In addition, checking you are on the register is one of the easiest ways to boost your chances of getting accepted for credit.

Having a stable residence

Lenders prefer their customers to be reliable and stable. Just like being on the electoral roll, customers who have stayed at a single address for three or more years are considered more stable than someone who changes address frequently.

Not having any active credit agreements or history.

If you do not hold any credit accounts or have no recent history of holding credit, this can make lenders apprehensive about lending. This is because a lender has no information to assess if you can afford to borrow the money or if they can trust you to repay the debt. At the same time, it’s a bit of a chicken or egg situation; looking at ways to build your score could work in your favour ahead of applying for more significant amounts of credit, for example, loans or mortgages.

Comparison site searches.

When you search for a new insurance quote on one of the leading price comparison websites, you might be surprised to learn that they carry out a soft search on your credit file to confirm your identity and will appear as inquiries on your credit report. While these will not be detrimental to your actual credit score, having multiple inquiries in a short space of time could be viewed unfavourably by a new lender.

It has also been found that large insurance brokers carry out hard credit searches on customers to assess their repayment history and the likelihood of making monthly repayments. The lesson here is to check the company’s privacy policy when comparing insurance quotes to understand how obtaining a quote could impact your credit file.

Understanding what can impact your credit file can help you to improve or maintain a good credit score. Having an above-average credit score means you will have more financial options available at the best rates on the market.

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