Credit scores play a crucial role in financial decisions, influencing loan approvals, interest rates, and even job applications. Despite how significant they are for your financial profile, many people still don’t know how credit scores are calculated.
When you know how they’re calculated, you can focus on improving that specific area.
Payment history
Your payment history is the most significant factor in credit score calculation. Timely payments on credit cards, loans, and bills reflect all play into this and have a positive impact on your creditworthiness. On the other hand, late payments, defaults, or accounts in collections can negatively affect your score.
Credit utilisation ratio
The credit utilisation ratio measures the amount of credit you use compared to your total available credit. A lower utilisation ratio indicates responsible credit management and can positively impact your score. High credit utilisation suggests potential financial strain, leading to a lower score.
Length of credit history
A long credit history is viewed favourably, as it provides a comprehensive assessment of your credit behaviour. Those with a shorter credit history may face challenges obtaining higher credit scores, as the information creditors will have available could be limited.
Credit mix
Having a mix of credit accounts, such as credit cards, instalment loans, and mortgages, can positively impact your credit score. A well-managed combination of credit types demonstrates your ability to handle financial responsibilities, boosting your creditworthiness.
New credit inquiries
When you apply for credit, lenders typically perform hard inquiries on your credit report. Each hard inquiry can slightly lower your credit score, as it may indicate increased credit risk. Aim to minimise unnecessary credit applications, especially within a short period, to protect your credit score.
Take control of your credit score
Understanding how credit scores are calculated empowers you to take control of your financial standing. By prioritising timely payments, maintaining low credit utilisation, and diversifying your credit mix, you can build and preserve a healthy credit score.
Check out our article about improving your credit score and see if you can use any of these steps to increase your rating.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
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