Understanding Your Credit Score

Understanding your credit score is simple. Especially due to the help of online credit checkers and tools which can help you understand the ins and outs. But, the hard bit is understanding where you can find this information along with all of the smaller aspects.

What is a Credit Score?

Your credit score is a 3-digit number. It helps lenders determine how likely you are to make your payments on time. Lenders use it as a reliable source of information which is created by your financial activity including things like utility bills, debts, rent, etc.

It is a summary of your credit risk, based on information from a variety of sources such as credit card companies you deal with, banks where you have loans—almost anyone who has issued you credit. The higher your credit score, the better.

What determines your score?

Your credit score is a rating based on your financial history. Credit reference agencies calculate your score based on how well you’ve managed your accounts in the past. The better your financial history, the higher your credit score will be.

Payment history – 35%

Your payment history includes things like:

  • On-time payments
  • Late and missed payments
  • How recently you missed payments or paid late.

All this is evaluated across all your credit accounts. If you’ve had or currently have problems with paying reliably, it will likely have the most damaging effect on your score.

Amounts owed – 30%

This is based on the entire amount you owe, the number and types of accounts you have, and the proportion of money owed compared to how much credit you have available.

Length of credit history – 15%

The longer your history of making timely payments, the higher your score will be. It may seem wise to avoid applying for credit and carrying debt, but it can actually hurt your score if lenders have no credit history to review.

New Credit – 10%

If you’ve opened a lot of accounts recently or applied to open accounts, it suggests potential financial trouble and can lower your score. However, if you’ve had the same loans or credit cards for a long time and pay them promptly – even after payment troubles – your score will go up over time.

Types of credit in use – 10%

Having a mix of accounts, including instalment loans, home loans, and retail and credit cards may improve your score

What doesn’t impact your credit score?

The following information does not impact your score, according to FICO:

  • Your race, colour, religion, national origin, sex and marital status
  • Your age
  • Salary, occupation, title, employer, date employed, employment history
  • Where you live
  • Any interest rate being charged on a particular credit card or other accounts
  • Any items reported as child/family support obligations
  • Certain types of inquiries (requests for your credit report)
  • Any information not found in your credit report
  • Any information that is not proven to be predictive of future credit performance
  • Whether or not you are participating in a credit counselling of any kind

Is a high credit score better than a low score?

Throughout your life, credit scores can play a key role in the financial products you take out. For example, when applying for a credit card or mortgage, your score will help determine whether your application is accepted and what you end up paying.

People with a higher score are often seen as lower risk, which means lenders are more likely to give them credit. As well as this, you might even get lower interest rates. You should remember that every lender and broker is different, so if you aren’t accepted by one, it doesn’t mean you won’t be accepted by another.

How to boost your Credit Score

Boosting your credit score might not be easy, but it is straight-forward. Although, it doesn’t happen overnight. It is possible to boost your score by a few points in as little as a week but improving it completely could take months, if not years.

A few examples of the best things to do are:

  • Pay your bills on time
  • Register to Vote
  • Keep your credit utilisation low

Your credit score is something which you should take care of, it can save you thousands of pounds on interest throughout your whole life, so it is something which we shouldn’t ignore. Hopefully, you will take all of this information into mind when deciding how you treat your credit.

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