A credit score is a numerical representation of a person’s creditworthiness, which is based on their credit history and current credit situation. In the UK, this score is used by lenders, such as banks and credit card companies, to decide whether to lend money or issue credit to an individual, and under what terms. Understanding the factors that influence the credit score can be instrumental in managing and improving your financial profile.
Credit history
This is the backbone of the credit score. it encompasses your borrowing and repayment track record. A long history of punctual repayments boosts your score, while late or missed payments, defaults, or bankruptcy pull it down. the longer your positive credit history, the more favourably lenders tend to view you.
Credit utilisation ratio
This ratio represents how much credit you’re using relative to your total available credit. For instance, if you have a credit limit of £5,000 across all your credit cards and you’ve utilised £2,500, your credit utilisation ratio is 50%. Generally, a lower ratio is viewed more favourably, as it indicates you’re not overly reliant on credit.
Length of credit history
This takes into account how long your credit accounts have been active. a longer credit history can be beneficial for your score, especially if it’s a history of timely payments.
Types of credit in use
Having a mix of credit types – such as mortgages, personal loans, and credit cards – can positively influence your score, as it indicates you can manage different forms of credit responsibly.
Recent credit searches
Every time you apply for credit, a ‘hard search’ is recorded on your credit report. if you make numerous credit applications in a short span, it could signal to lenders that you’re in financial distress, which could negatively impact your score. It’s advisable to spread out credit applications and only apply when necessary.
Public records
County court judgements (CCJs) for debt, insolvencies, and bankruptcies can seriously harm your credit score. These remain on your record for several years and signal a high risk to potential lenders.
Associations
Your credit score can also be affected by the financial behaviour of people you have a joint financial product, such as a joint bank account or mortgage. If they have poor credit habits, this could affect your score negatively.
Personal information stability
Frequent changes in personal details, like changing addresses often, can raise a flag for potential identity fraud or instability, and might slightly influence your score.
In the UK, there are three main credit reference agencies: Experian, Equifax, and TransUnion. Each of these agencies might have a slightly different score for you based on the data they have access to. regularly checking your credit report from these agencies can help you identify any errors and understand your credit standing.
In conclusion, your credit score is a vital component of your financial identity. by understanding the factors that shape it and making informed decisions, you can work towards building and maintaining a strong credit profile.
💡 Further reading: What is a good credit score?
