In this blog, we will be looking at what really impacts your credit score. It is vital to understand what influences and affects your credit score, especially in this day and age when your credit score plays such a large part in almost every application for credit whether it be for a payday loan, a mortgage or a personal loan.
So, What Exactly Is A Credit Score?
A credit score is literally a score that is based upon your historic relationship with finances, credit and money management. Essentially, the more skillfully you have managed your accounts and therefore your relationship with your finances, the higher and more positive your score will be. This score is not set in stone and will fluctuate in reaction to the management of your money (though is not updated in real-time).
Banks, financial institutions and lenders will all use your credit score to assess your eligibility for credit. Having a strong credit score is vital if you want to secure yourself the best rates on credit cards, mortgages and loans. With a weaker or a lower score, you have restricted access to deals and rates, meaning the overall cost of the loan itself, for example, will increase.
Now that we have provided you with a brief overview of what a credit score actually is, it is time to explore what really impacts your credit score!
What Really Impacts Your Credit Score?
The credit score itself will be a number that ranges from between 300 and 850, with different weightings given to different facets of the score (we will indicate this weighting with a % at the end of each subheading). We will now breakdown for you each of these facets, what they mean, and how they impact your credit score.
History Of Payments 35%
Your history of payments, or simply, payment history, refers to how promptly you have paid/are currently paying your bills. This is an incredibly important factor in regard to your credit score and has the highest weighting of all the facets. Missing, or making even one single payment late can have a dramatic impact upon your credit score. For lenders, they need to be confident that you can repay your loan on time, every single time. This is just one of the reasons why your payment history is such an important credit score factor. These payments that are covered under this section of your score are numerous and can refer to the following:
- Credit card payments
- Mortgage repayments
- Bills, including utility bills and mobile phone contracts
- Car finance agreements
The above is by no means an exhaustive list and is simply an example.
Outstanding Debts 30%
This section has two different parts. The first is simple and refers literally to the amount of debt, or credit, that you currently have outstanding. The second part is where things get a little bit more complicated. A calculation called credit utilisation is used in this second part. Credit utilisation is the ratio of your total credit owing in relation to your credit card limit. A general rule of thumb is to keep your credit card utilisation at around 30%. Therefore, if you have a credit limit of £1000 on a credit card, then you should try and keep your amount of credit owed at £300. If you have a high amount of credit outstanding and are for example operating at between 80% and 90% (£900 out of £1000) of your credit card limit, then this can have an extremely negative effect on your credit score as a whole.
Credit Age 15%
The age of your credit accounts has a direct (but not a massive) effect on your credit score. The older your accounts (the longer you have had a credit card for example) then the better. Typically, those individuals who are in possession of a high credit score are those who have held their credit or their accounts with credit attached etc for a long period of time. If you have a long and positive history of managing your credit (without having any negative associations such as late payments etc) then you are more likely to be accepted for credit in the future.
Credit Diversity 10%
This aspect of your score relates to the different types of credit that are on your account, or, your credit diversity. Though credit is itself a diverse thing, it is grouped into two separate categories, namely:
Revolving accounts: A revolving account refers to the process of having a balance that does not need to be paid off in full each month, whereby a “minimum amount” that itself is based on the account balance is generated and can be paid off each month. An example of a revolving account would be a credit card.
Instalment loans: An instalment loan is a loan or type of credit that is repaid over a pre-determined length of time (anything from 1 year to 25 years). An example of an instalment loan would be a mortgage.
Having both of these different types of credit on your credit history/credit file is beneficial for your credit score. However, if you do only have one type of these on your credit file then the overall score won’t be affected too negatively as the credit diversity aspect of your score is only 10%.
New Credit Applications 10%
A new credit application, or new credit inquiries, are created each time you make an application for credit, and can include applications for credit cards, for personal loans, for mortgages, car finance and much more besides. You should avoid making multiple applications in one go. Thankfully, only applications that you have submitted in a 12-month period show up and every application for credit that you have made disappears after 24 months.
We hope that you have found the information in this blog useful, and we also hope that you now have a much greater understanding of your credit score, its constituent parts and what really impacts your credit score. If you would like to discuss a payday loan, or if you would like to apply for a payday loan, then please do get in touch.
If you happen to have a bad credit score then do not worry, this does not automatically disqualify you from taking out a payday loan with us. We use multiple factors and metrics to make our decisions regarding a payday loan application and we would always recommend that you apply first, before you disregard it as an option.