What are the different factors that affect your credit score?

Representative Example

Total amount of credit £80, duration of the agreement 29 days, rate of interest 292% per annum (fixed), total amount payable (in one repayment) £98.56. Representative 1281.8% APR.

The relationship between the financial decisions that you make and their consequences contribute towards the outcome of your credit score. Since we have considered what credit scores are and why they are important, the natural next step would be to understand the different factors that create and affect credit scores. By understanding the makeup of credit scores, individual's will be more able to curate and utilise their scores to better help them towards achieving their financial goals. Better credit scores could also be beneficial when it comes to applying for short-term credit including online loans.

Borrowing and repayment history

One of the primary components that becomes evident when accessing a credit report is the list of all previous borrowings one has had. Initial credit amounts, current account balances, methods of repayment and the frequency of payments will appear under each credit sum listed, including any instances of late and/or non-payments. The number of times that you have defaulted on a loan as well as any CCJ's accumulated will also appear where applicable.

Many of these factors work together to provide Credit Reference Agencies (CRAs) with snapshots of your current financial position and thus how to score you in comparison to the rest of the population. For example, someone with multiple credit accounts and zero late repayments could be viewed as lower risk compared to someone with fewer credit accounts but more late repayments. However, someone with fewer credit accounts and zero late repayments could be deemed an even lower risk and be provided with a higher credit score compared to the previous two examples.

Each of the factors therefore, both individually and collaboratively, affect your credit score to varying degrees. However, do keep in mind that information should appear on your credit report for a maximum of 6 years. Any detriments to your credit score can make it difficult to obtain further credit until these negative entries leave your file.

Graph and pie chart

Credit utilisation

Credit utilisation describes the amount of credit that you have spent as a ratio of the credit limit you currently have available. For instance, if you have a credit card with a credit limit of £2,500 and you currently have an outstanding balance of £1,250, that means that you have utilised 50% of the credit available to you.

When it comes to calculating credit scores, credit utilisation ratios play a pivotal role. For example, someone currently using 30% of their total credit allowance may be seen as a more responsible borrower compared to someone currently using 70% of their credit allowance. That being said, individuals who use 0% of their credit allowance may be identified as higher risk due to their limited repayment history making it difficult for CRA's to understand and establish a repayment pattern for that individual. In general, on average a 50% credit utilisation ratio is deemed preferable.

Duration of credit history

The length of your credit history also plays a significant part when it comes to calculating your credit score. When an individual has limited to no credit history, CRA's find it difficult to establish a credit behavioural pattern for that individual making their financial profile less concrete and therefore more uncertain. This could therefore result in a lower credit score than one would expect given that they have no history of debt.

However, the same could work for the opposite scenario i.e. someone with a very long-standing credit history. This could indicate that the individual has been reliant on credit for long periods of time (e.g. continuous churns of borrowing and repaying) which could demonstrate someone is in financial difficulties.

Location and the electoral roll

Being on the electoral roll and having lived at the same location over a long period of time indicates stability. It suggests to credit providers that the individual is less likely to flee or disappear without repaying their debt. It also suggests to credit providers that repaying debt does not have a negative effect on someone's financial stability as this person has been able to continuously make rent and utility payments without getting into financial trouble. From this it follows that such an individual will be able to sustain themselves whilst repaying debts in the future.

New credit applications

Multiple credit applications within a short period of time could indicate that an individual is going through some form of financial difficulty. It implies that the borrower has a reason to obtain a certain amount of credit in order to cover a large expense which they would otherwise not be able to afford. This borrowing pattern may suggest a higher need for financial support through borrowing, and therefore an increased risk of not being able to adhere to repayment schedules. Having a number of these inquiries in rapid succession on your credit report can paint an overall negative image and adversely affect your credit score.

Other factors that affect your credit score could include:

  • Credit inquiries
  • Credit portfolio mix
  • Incorrect recording of information
  • Bankruptcies or IVAs
  • Fraudulent transactions
  • Criminal convictions

All these variables intertwined to play a crucial role in determining both the content of your credit report and the outcome of your credit score. To further understand what causes fluctuations in your credit score and why, read on to the next guide in this series.