Credit scores are important. We all have one, some better than others. It’s what lenders look at when you apply for credit such as a mortgage, loan or credit card. A higher score indicates to lenders that you are more creditworthy and likely to repay debt. There are several key factors that can impact your credit score, and they are important to know if you are planning on applying for a mortgage or loan.
Payment History
Your payment history is one of the biggest factors in determining your credit score. Lenders want to see that you have a track record of repaying debts on time and in full. Late or missed payments will lower your score. Even a single late payment can drop your score, and the impact is greater with more recent late payments. The more consistent you are with on-time payments, the better your credit score.
Credit Utilization
This refers to how much of your available credit you are using at any given time. Generally, lenders prefer to see you using less than 30% of your total available credit limit. Exceeding this threshold can negatively affect your credit score. For example, if you have three credit cards with £1,000 limits each, your total available credit is £3,000. Try to keep your outstanding balances below £900 across all three cards.
Length of Credit History
The longer your credit history, the better. This demonstrates that you have successfully managed credit accounts over an extended period. Lenders like to see that you have experience paying back different types of credit, such as credit cards, personal loans and mortgages. A short credit history gives lenders less information to assess risk.
New Credit Applications
When you apply for new credit, a ‘hard check’ is performed on your credit report. Too many hard checks in a short span can slightly lower your credit score. This indicates to lenders that you are hungry for new credit or even in financial distress. Apply for new credit selectively and limit hard checks to about one per year.
Hard Checks vs Soft Checks
A ‘hard check’ leaves a mark on your credit file that can slightly ding your score; bear this in mind when you consider applying for a loan or similar, to avoid unnecessary applications. ‘Soft checks’ are when you check your own credit report or a lender checks it for pre-approval. A soft search credit check will not affect your credit score. Always verify whether a lender will run a hard check or a soft check when you apply for credit, especially if you are not sure whether your application will be accepted.
Credit Mix
Having a diverse mix of credit types (mortgage, credit cards, car loan, etc) shows lenders that you can responsibly manage different credit products. It also provides a fuller picture of your credit habits over time. Relying mostly on one type of credit can negatively impact your score.
By understanding these key factors, you can work toward building your credit score over time. Pay all bills on time, keep balances low, limit hard checks and demonstrate longevity and diversity in your credit history. With good credit habits, your score will reflect your creditworthiness.
