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7 surprising factors that could affect your credit score

There are three big credit reference agencies in the UK – Experian, Equifax, and TransUnion (previously named CallCredit). And, whether we like it or not, the information each of these companies holds us on has a big influence on many of the choices we make in life. The higher your credit score, the more doors will open for you.

For many Brits, what a credit score actually is is a mystery to them. Is a credit score the same as a credit report? What’s a good credit score and what’s a bad credit score? How do lenders use credit scores as part of their decision making?

You’ll be pleased to hear that it’s actually a lot less complex than you may think. In this article, the Growing Power team explains what a credit score is and we share with you some of the surprising factors that could affect your credit score.

What is a credit score?

Firstly, let’s think about your credit report. Your credit report is like a record of your financial past and present. Credit card providers, banks, financial institutions, the court system, utility companies, mobile phone providers, and even Sky send information about you every month to the credit reference agencies.

What’s actually on your credit report? Here’s a small selection of the information the credit reference agencies have about you:

  • if you’re making payments on time and in full to the companies and lenders you have agreements with
  • the number of credit accounts you have and details of the credit they’re providing you with
  • how much of the credit available you’re using,
  • your address history, and
  • whether you have any county court judgements, are in an Individual Voluntary Arrangement, or have been declared bankrupt.

As we mentioned earlier, your credit record is updated all the time with the very latest information. Each agency then uses the information they have on you to produce a credit score.

Each agency has their own scoring system which looks something like this:

Experian Equifax TransUnion
Excellent score 961-999 (max) 466-700 (max) 5
Good score 881-960 420-465 4
Average score 730-770 370-380 3-4
Fair score 721-880 380-419 3
Poor score 561-720 280-379 2
Very poor score Up to 560 Up to 279 1

Lenders consider both your credit score and the details of what’s in your credit report when they’re making their mind up on whether to approve any application you make to them.

There are a lot of misconceptions and misunderstandings about credit scores and credit reports in general. So, we wanted to take this opportunity to share with you seven things you might not know about how credit scores are calculated.

1. Affordability is more important than income

This comes as possibly the biggest surprise to many people but having a high income doesn’t automatically mean you’ll have a high credit score. The size of your salary is generally not related to how high or otherwise your credit score is.

What lenders are generally more concerned about is your level of disposable income. Disposable income is what you have left after you’ve received your wages and you’ve paid all of your essential bills (like council tax, utility bills, any credit accounts you have, insurance, the weekly shop, and so on).

Lenders want to see that your debt is “serviceable”. Different lenders have different definitions of what is “serviceable”.

Let’s say that, for example, you have £1,000 disposable income every month. If you applied for a loan and your repayment was going to be £200, then there’s still a fair amount of room left in your budget. However, if your repayment was £900, that’s likely to be a bit too close to comfort for a lender to say “yes” to your application.

2. Your credit card spending

With each credit card account you have, there are two important numbers that credit reference agencies use when they’re deciding what credit score to give you – the “balance” and the “limit”.

The balance is the amount that you see on your bill every month and the limit is the maximum amount you can spend. For example, if you have a credit card with a £2,000 limit but your balance is £500, then you have an “available limit” of £1,500 remaining.

As a general rule of thumb, your credit score is likely to be higher when, across all your credit cards, your overall available limit is high.

Let’s say that you had three cards and the total limit across the cards was £10,000. The lower your overall balance, the better your credit report is likely to look to another lender you might wish to approach. If the combined balance on all three cards is, say, £8,000, a lender might think that you are relying too much on debt to meet your general financial commitments.

If you do have multiple cards, it may make look better on your credit report if you spread your spending out reasonably evenly over the different accounts you have.

3. Paying your bills on time

In recent years, more and more companies have started to send your payment records across to the three big credit reference agencies. In addition to the credit card and loan companies you have accounts with, the companies you deal with like your gas and electricity supplier, mobile phone provider, and even Sky update your credit reports once a month letting them know whether you’ve paid their bill.

For lenders, this is very useful information because it gives them a broader picture of your ability to manage money. Missing the odd payment is unlikely to affect your credit score but it may affect the way a lender views you when you apply to them. Missing a few payments in quick succession is likely to have an adverse effect on your credit score.

4. Your loyalty to your current credit card and banking providers

Another factor that will likely work in your favour is the length of time that you have had your bank account and your credit cards. This may make a lender believe that other financial institutions have maintained a good working relationship with you over a number of years and, as a result, you’re a good risk.

If your credit card accounts and bank account have been opened more recently, this may actually lower your credit score until your credit report demonstrates that you’ve kept up with all repayments on time and in full.

5. The number of times you apply for credit

There are two types of credit search – “soft credit searches” and “hard credit searches”.

Many lenders will run a soft credit check on someone applying for a loan or a credit card. Soft credit checks are like background checks – they’re used to check to see if you might be eligible for a financial product and to provide indicative quotes. Only you can see soft searches on your credit report – they’re invisible to other lenders and they have no effect on your credit score.

Hard credit searches are different. This type of search give lenders access to everything that’s on your report as well as to your score. The more hard credit searches a lender sees on your report within a short space of time, the less likely they are to want to lend you money. It may also reduce your credit score.

6. Your financial associations

Over time, credit reference agencies look for financial links between you and other people. These other people could be your spouse or civil partner, your parents, or even your children.

If you’re thinking of making a joint application for a loan, you should really only do so if both of you have good credit scores. If you apply for a joint loan and one of you doesn’t have a good credit rating, then you may be more likely to have your application approved (source).

Sometimes, financial associations can negatively impact your credit score by mistake. There’s a great article in the Telegraph about it that you can read by clicking here.

7. Online gambling

You might have heard that users of online gambling are more likely to have a lower credit score because of their gambling. It’s true and not true at the same time.

Credit reports often now contain information about the companies you spend money with – including gambling platforms. Gambling has become a lot more popular since the advent of easy-to-download mobile phone apps – millions of people use them every day.

If a lender sees on your account a number of payments to different gambling companies, they may worry that you have a gambling problem and that the money you want to borrow will be used for gambling. Not every lender has this opinion however and, among those who do, they may have different “trigger” points at which the amount you’re spending becomes a reason not to approve a loan.

There’s an interesting article about it on CheckMyFile that you might want to read – click here.

Taking care of your credit score

One of the most important things you can do to take care of your credit score is one of the simplest – make sure that you’re on the electoral register. You can add yourself to the voters’ roll on the government’s website.

Your credit score, in combination with other factors, is something you should try to maintain and improve whenever you can. What’s on your report will strongly influence the types of credit you can take out, the mobile phone deals you can take advantage of, whether you can pay your insurance off in instalments rather than in one go, and so on.

You should download your credit report once a year from one or more of the three credit reference agencies to make sure that the details they hold on you are correct.

If they aren’t, you can correct them free of charge. Please use the following links to visit the relevant page on each of the agencies’ websites – Equifax, Experian, and TransUnion.

Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk.