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Your credit score is a reflection of your credit history, debt and other financial factors that lenders use to determine how trustworthy you are to borrow money. It’s important to keep your credit score as high as possible, as negative credit can impact you for years to come and restrict your ability to access mortgages, loans and finance payment plans.
In this article, we take a look at five key factors that make up your credit score, and offer some helpful tips for keeping them in the green.
Payment history
Anytime you take out a finance payment plan, loan or credit card, each payment is recorded on your credit report. Missed payments are included, so make sure you repay back any borrowed money before the due date and avoid overspending. As a factor making up 35% of your total score, this is a crucial part of keeping your credit score high.
This calculation also takes into account retail store cards, showing how much you’ve borrowed, how much you still owe, and how often you’ve let payments run overdue. A great tip to stay on top of all of your borrowing and not let anything slip through the net is to make a budgeting spreadsheet, where you can record all of your spending and borrowing. Set up reminders in your calendar so you don’t miss any important minimum payment dates, and be sure to pay off your debts as quickly as possible.
Credit utilisation
Another key factor that impacts your overall credit score is your credit usage, or utilisation. This analytic shows potential lenders how much you typically use of the credit available to you. Keeping this percentage low is helpful when applying for mortgages and larger loans, as it reassures lenders that you’re not reckless with your borrowing.
Having a low credit utilisation ratio may also help you secure lower interest rates on future borrowing. Bear in mind that this data is drawn across all of your current credit cards, so be sure to only borrow a little from each to keep it reasonable. Under 30% is the place to be when it comes to credit utilisation.
Recent activity
Whilst your credit report contains historical data from seven years ago to the present, it also has the ability to highlight your recent activity to potential lenders. This is why your credit score is likely to drop a little after applying for new credit. Applying for a new card, loan or credit account indicates that you’re preparing to take on larger amounts of debt, which can be a risk factor for lenders.
Spacing out your credit enquiries is the best way to avoid being adversely affected by this, especially if you’re applying to borrow a large sum of money. When you apply to take out new credit, the lender will run a ‘hard check’ on your credit report – this can cause your score to drop, but so long as you keep up with your repayments it will recover shortly.
Debt
Naturally, the amount of your total debts is recorded as part of your credit score. This is why paying back what you borrow, as quickly as possible, is an important part of maintaining a healthy score. Missing payments recurrently can impact your score for as long as seven years, so be sure to stay on top of your debt.
If you have large amounts of debt, consolidating them into one account can be a good option as it can enable you to pay less interest and begin to make a dent in your debt with one regular repayment. Although it may cause your credit score to drop initially, it will slowly rise again so long as your repayments are upheld.
Black marks
Finally, ‘black marks’ on your credit report can significantly impact your score for many years. A single hard inquiry can linger for up to two years, whilst serious issues such as defaults, foreclosures and delinquent payments can stick around for up to seven years. Bankruptcy will negatively impact your credit score for up to ten years, so it’s vital that you manage your credit usage carefully before you run into trouble.
Ultimately, the best way to avoid a bad credit score is to keep a keen eye on your finances, and avoid the temptation to take out every credit offer available to you.
