Personal social credit score. Machine Learning analytics identify person technologyA positive credit score is an important asset for the vast majority of people. After all, this score is used by lenders to determine if they should provide the requested financial amount to borrowers.

This isn't just when you apply for a credit card. Your credit score number is also used by mortgage bankers, car dealers, payday loan companies, and other lenders to determine if you're a suitable applicant or not. Only when successful will they settle on the amount they are willing to loan you, plus their specific terms and interest rates. Everyone from landlords to insurance companies can also analyse your credit score for a greater idea about your financial responsibility.

Having a poor credit score can be restrictive in various areas of your life. It can stop you from acquiring a car or finding a new place to live. Yet, what factors affect credit score ratings? Plus, what can you do to ensure you possess an excellent credit score? This guide will explore the answers.

Note: you have more than one credit score

It's true! You might believe that you only possess a single credit score that is used by every potential lender, but this isn't the case. There are four credit reference agencies in the UK that use their own criteria to determine your score. These agencies are:

  • Experian
  • Equifax
  • TransUnion
  • Crediva

Depending on the data they can access and the criteria they use, each one of these agencies can utilise different information when calculating your score. Plus, the way they view your information can differ. For instance, your report may feature a certain record. One company could see this record as a negative point, while another might actually consider it a positive.

Due to this, your score can vary depending on the credit reference agency that is used. Certain lenders may also have their own criteria to calculate your credit score. That said, they will usually take into account the same general points when putting together your score.

Below are the main ones to remember if you want to improve your credit rating:

1. Payment History

As far as your credit score is concerned, there's one more important component than all the others: your payment history. Simply put, lenders have a preference for customers with a proven history of successfully dealing with their existing credit accounts and debt.
Your payment history can also throw up some red flags to lenders. For instance, if you've drifted into a position where you are only meeting the minimum payments on your credit card, this may suggest to lenders that you're dealing with a financial crisis. It can also suggest there has been a negative change in your current circumstances, and you're not as suitable for credit as you were previously.

Lenders are not the type to take risks. This means if your financial profile is worsening, you're less likely to have a credit score that matches up to their requirements. Always pay your bills on time and try to clear your debt as soon as possible. It's also imperative you avoid any late payments or even skip payments altogether. Do this, and your credit score is going to plummet.

2. Credit Frequency

This may come as a surprise, but a long history of using credit can often be more beneficial for your score than a limited history. The reason for this is simple: a limited credit history means there's less proof you're reliable for completing repayments on time.

However, if you're too dependent on credit, this can also have negative results for your credit score. If you max out your credit limit or use up your full overdraft, for instance, lenders are liable to believe you've fallen into financial difficulty.
Another mark on your record could be if you have made multiple credit applications, especially if this is done over a relatively short space of time. Lenders may see this as a sign that you're being overburdened with debt. It's also likely you will struggle to gain any further credit as a result.

Handle credit responsibility, and your credit score will receive a healthy boost.

3. Borrowing beyond your means

When someone has reached the stage where they cannot pay off their debts, this is obviously going to lead to serious ramifications for their credit score. This could lead to an Individual Voluntary Agreement or Debt Relief Order.

This isn't good, but lenders can even go one step further. They can issue a County Court Judgment against those in debt in an effort to reclaim the money they're owed. Additionally, a lender can push someone into going bankrupt.

If any of the above happens to you, your credit score will be punished severely. It may block you from borrowing money from loan companies that are willing to accept those with a low credit rating. It can even prevent you from opening a new bank account.
To prevent this from happening, avoid borrowing beyond your means and never take on more debt than you can handle.

4. The number of accounts you own

Do you currently have multiple loans and credit accounts on the go? If so, this is likely to result in you having a lower credit score.

With that said, one solution to this issue is to reduce the balance of these accounts to zero. While this might not be achievable straight away, you have to remember that credit scoring models focus on accounts with large balances. The less of these you have on the books, the more favourable they'll view your situation - even if you do possess numerous credit accounts.

Yet once you do get these accounts down to zero-balance, avoid closing them for good. A closed credit account will only reduce the overall amount of credit available to you. This may sound unfair, but this is simply your credit utilisation ratio at work. You could have a large overall credit balance available, close an old account, and suddenly lower your credit balance significantly. This isn't good as lenders could view your account as now being up to its max credit balance.

5. Hard credit searches

Whenever you go through with a new credit application, this results in lenders creating searches that look into your credit report. A search like this is known as a "hard search". If you make too many applications - and consequently create too many hard searches - this may indicate you're a credit risk.

It doesn't matter if your application is approved or not. Each one adds a hard search to your report. As a result, always be careful with each application and attempt to only apply for credit you know you'll be eligible for. The less hard searches on your report, the less negative effect they will ultimately have on your credit score.
The good news about these hard searches is they don't have a permanent position on your credit report. With time, the impact of these inquiries diminishes to a significant degree - and disappears completely after 12 months.

What doesn't impact your credit score?

When it comes to credit scores, you may have read a lot of misinformation about what can actually affect your rating. To help clear up some of the confusion, the following list will cover points that don't actually impact your credit score:

  • Those you live with: Do you live with your family or friends? Well, the financial situation of your family/friends won't actually play any part in your credit score. The only exception to this is if you are financially linked to someone, such as if you use a joint bank account with your spouse or have a joint mortgage. Note: it doesn't count if you are sharing the rent.
  • Previous occupants at your address: Extending on from the previous point, it also doesn't matter who lived at your home address before you moved in. Even if they were a millionaire or bankrupt, companies only have interest in your direct financial details - not those of previous occupants.
  • Analysing your credit score: It doesn't matter how many times you check your credit score or credit report. This won't ever affect your score.
  • Comparing credit offers: It is fine if you want to receive quotes for various credit cards and loans. This is simply known as a soft check and it doesn't impact your credit score or leave any sort of record on your credit report.
  • Your distant credit history: Don't be too worried about that credit card payment you missed a decade ago. Companies usually only focus on recent credit information, and your credit report usually only goes back about six years at most.
    Also note that other elements like your employment, income and savings don't come into the equation with your credit score. Yet even though these aren't recorded on your credit report, this doesn't mean lenders won't ask you about these factors. If you're applying for credit, for example, a company is likely to use details about your personal finances to calculate if you're eligible.