What factors affect your credit score?
If you’ve watched TV today, turned on the radio, browsed the internet or checked your emails, there’s a strong chance you’ve seen the words ‘credit score’ referenced.
And with good reason. A good credit score can be a gateway to achieving what you want in life and can be a solid ally when looking to make a big purchase – be that a new car, a mortgage on a new house or even an additional property as an investment.
Conversely, a negative credit score can impact your life plans and the ability to borrow, as a negative score can act as a red flag to lenders – after all, their main consideration when considering lending credit is a borrower’s ability to pay it back.
Ranging from Exceptional (800 to 850) down to Poor (300 to 579), the good news is your credit score is controllable and, even if not currently in a healthy position, can be improved to ensure that this universally acknowledged financial benchmark becomes a help and not a hindrance.
What impacts your credit score and how can you keep it in good shape?
Paying on time – For the vast majority, borrowing is a fact of life so, within reason, owing money is in itself unlikely to unduly affect your credit score.
What is more critical is your ability to meet agreed payments. Missing a payment(s) – be that a monthly mobile phone bill or a mortgage instalment – will impact your score and put doubts in the mind of potential lenders.
If you miss an instalment there are ways to limit any damage – your credit score will be impacted more if the debt remains outstanding for a longer period, so rectifying the missed payment as soon as possible is important.
Length of credit history – Much like car insurance usually decreases based on the number of years without claims, confidence that you are a solid person to lend to increases with your credit history.
For example, a history of seven years’ regularly meeting repayments on finance will instil more confidence in a would-be lender than, say, six months.
That’s why ensuring your financial wellbeing and outlook is so important as, if in a healthy position, this crucial element of determining a good credit score can almost look after itself.
Current levels of debt – Naturally, the more we owe and the more debt we have acquired, the more this will be seen as a potentially negative aspect for a lender to weigh up.
This manifests itself in your credit score, with significant debts impacting your score – the general rule of thumb is that using 30% or more of your available credit will be taken as a negative factor on your credit score.
To combat this, it’s worth paying off debts as soon as possible to reduce the perceived reliance on borrowed credit.
Variety of borrowing – Over reliance is rarely a good thing and lenders often look favourably on individuals who spread their borrowing in a manageable way, such as through credit cards, mortgages and instalment loans.
The weighting of this element of credit score is relatively low so, whilst varying your borrowing can be helpful, there isn’t a need to open new accounts if there is no real reason to do so.
Every credit score – and the circumstances behind them – are different. At Wills & Trusts, we passionately believe in offering bespoke services and advice tailored to an individual’s needs and their own unique set of circumstances.
For more on optimising your credit score and, indeed, your wealth and financial future, contact our experienced, friendly and expert team today.