What Affects Your Credit Score?
Right, I think the most annoying part of writing about credit scores is probably that most people don’t care about their own – until they want access to credit. A credit score is a measure of how good you are with credit (money) over your lifetime. All in all, I can’t stress this enough; always try and optimise your credit score as soon as you turn 18, as it will save you thousands in interest over the your life. Even if you’ve passed this milestone, don’t worry – we’ll help learn how you can get your credit score looking as good.
So, what are the 5, YES F-I-V-E ways, which affect how your credit score is looking?
Some reviews and articles on credit scores can be long-winded, confusing, and just hard to understand. We’ve put together a streamlined guide which will give you a good insight into credit scores, and how they work.
1. Payment History – Payment history is the most important factor which affects your credit score. Credit lenders want to be sure that you will pay back your debt (and on time) before lending you any credit. Missing a payment can really damage your score – which is why it is key you always pay AT LEAST the minimum payment on any type of credit you have. Your payment history will account for 35% of your overall credit score.
2. Credit Utilisation – Simply put, credit utilisation is just how much of your total credit limit you have used. For example; if you have a £1000 credit limit and have spent £1000, you have used 100% of your credit utilisation. If you have a £10,000 credit limit and have spent £1000, then you have a 10% credit utilisation rate. The key is to have a low credit utilisation rate, under 10% is recommended as it shows lenders you are reliable and disciplined in your spending. It also shows that you have enough credit in order to pay if you have an emergency. Your credit utilisation will account for 30% of your credit score.
3. Credit Age – This is your total combined age of your accounts divided by the number of accounts you have. As an example here, if you have had an account for 8 years and only have that one account, your credit age will be 8 years. If you then open a new credit account, then it will divide the 8 by 2 to get 4 years. Because of this, it’s important not to close down your old accounts unless there’s a good need to do so. Your credit age will account for 15% of your credit score.
4. Credit Mix – A Credit mix is just a portfolio of different credit accounts, which might include, credit cards, personal finance loans, mortgages etc. The better the mix, the better the score. This is because lenders can see that you can juggle a wide range of credit products and HOPEFULLY manage to pay them all on time. Your credit mix will account for 10% of your credit score.
5. New credit. New credit is just the number of credit accounts that you have recently opened, as well as the number of hard inquiries you have made. Too many accounts and inquiries can indicate that you are an increased risk and as such hurt your score. New credit will account for 10% of your credit score.
Types of Accounts That Impact Credit Scores
There are two types of debt that will affect your credit scores: Installment credit and revolving credit.
1. Revolving Credit – Typically this works out as any credit cards that are in your name, but can also include some types of home equity loans. Because credit scores monitor your financial information it is really important to always pay at least the minimum on any type of revolving credit. Accruing interest isn’t a damaging factor on your credit file as long as you have made the minimum payment. Revolving credit tends to have a credit limit which can fluctuate due to economic circumstances as well as your personal ones. This is why credit cards can be a good short term* fix on your score or can really damage it.
*NOTE – There isn’t really a ‘short term fix’ to your credit score. However, having a credit card and making the payments every month for a period of 6-9 months can really help stabilise and increase your score.
2. Installment Credit – Usually credit which has a fixed amount that you have agreed to pay each month, such as; personal loans, mortgages, or auto loans. This differs from revolving credit as the minimum payment is the FULL amount.
As you can see credit scores can be rather confusing and have a lot of factors that often go against each other in the short term. This is why it is so important to always be on top of your credit score and start working on it as soon as possible. You can check your credit score for free using Clear Score, Experian or Credit Karma