A good credit score opens the door to the best financial deals, determining not just whether you get accepted but how much interest you will hand over.
Yet many of us are in the dark about what actually appears in our file and the impact our habits really have.
As many as 26 per cent of borrowers are unaware your repayment history appears on your credit file, according to new research from Totally Money.
This is despite the fact that how disciplined you are at repaying on time is the biggest contributor to your overall score – making up almost half of your score.
The research from the credit scoring site showed that missing or making late repayments strike a heavy blow to your score, with 48 per cent of your total calculated using whether you are diligent with repayments.
Missed payments can stick on your credit file for up to six years, but how recent they are can also determine how significant future lenders will consider them as.
Striking the perfect balance
If you need to improve your score, you might be thinking about how long it takes to rebuild your credit, but don’t cram for that thought too much, the next thing to get right is the balance of how much of your available credit you use, accounting for up to 21 per cent of your overall score, according to Totally Money.
This means looking at your limits across all cards, loans, mortgage, and overdrafts and calculating firstly how much credit you have available to you and secondly how much of this you utilise.
What’s your score?
There are three different credit referencing agencies, each holding a separate file for you.
The information should be broadly the same but their scoring systems are different.
CallCredit holds a score of between 0-710, Experian scores borrowers between 0-999 and for Equifax it’s 0-700.
The magic balance is likely less than 25 per cent of the total amount you can borrow, according to the research.
Credit referencing agency, Experian has in the past said that keeping a balance below 30 per cent can add 90 points to your overall score.
Borrowing more than 15 per cent will drop your score by a few points according to Totally Money, but borrow more than 50 per cent of the amount offered to you and it will fall considerably.
This is because it draws potential lenders to believe you are struggling to manage the credit you already have, so lending you more is not a good idea.
Have you been borrowing for long?
An equally important factor is your borrowing experience, also making up 21 per cent of your overall score.
This means lenders deciding on an accounts you have and how long they have been open.
A range of accounts, held for a long time will stand as proof to lenders that you have experience managing different kinds of debt.
They also like to see long-standing relationships with lenders as it shows stability, rather than frequent chopping and changing of accounts.
Credit score: A good credit score opens the door to the best financial deals
What won’t appear on your file
As many as 34 per cent of borrowers believe that their income is shown on their credit report.
While lenders often ask when you apply for a loan or credit card, it’s not shown on your credit file.
Checking your own report won’t affect your score, something 39 per cent of people wrongly assume, according to Totally Money.
Just under half of consumers, 41 per cent, wrongly believe where they live has an impact on their score.
Appear desperate and you will take a 5 per cent hit
According to Totally Money your desire for credit accounts for five per cent of your total score.
This means account openings, closures and the time line of both.
According to Totally Money opening new accounts makes you look eager for credit, lowering your score, while closing accounts can show less desire for borrowing.
If you do choose to close some accounts, make sure to consider how this will affect the balance of how much of your available credit you are using.
If you are applying for a new account or credit card remember that every time lenders make a search of your file for a new financial product, it leaves a mark.
While this wont directly impact your score, if you are rejected and go on to have a spate of applications in a short space of time it might make you look desperate for credit.
It is best to therefore space out any applications, or use a smart search tool first to see if you are likely to get accepted before you commit to applying.
These only run a soft search of your file which won’t impact your score.
Variety is the spice of life
There are of course several different types of credit, some you might not even realise are classed as such, for example mobile phone contracts or gym memberships.
Five per cent of your score is comprised of the variety of credit you hold.
Broadly speaking, the selection shows that you are able to stay on top of several different types of repayment.
For example, personal loans require fixed monthly repayments while credit card repayments fluctuate according to how much you use them.
These might include:
- Credit cards
- Mobile phone contracts
- Utility bills
- Finance agreements (such as buy now, pay later)
- Gym memberships
What about a partner’s debts?
More than half don’t realise that lenders will take into account a partner’s borrowing history too, if you have a shared bank account for example.
It won’t affect your actual score, but shared accounts create an association between you and the other person’s finances, which other lenders and banks are able to see on your credit history.
This can can make it more difficult for you to be accepted for financial products in the future.
This is because the association allows lenders to view the files of those you are linked with, when they consider your application. If they believe their circumstances could affect your ability to pay, they are more likely to reject you.
Make sure you review your score regularly and always close any jointly-held accounts you no longer use.
Find our more in our guide to joint bank accounts
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