Let's decode your credit score and what's involved.
Understanding the ins and outs of your credit score is crucial when it comes to navigating the world of credit. Your credit score, a numerical representation of your creditworthiness, plays a significant role in determining the interest rates and terms you’ll be offered by a lender. In this blog post, we’ll delve into the factors that influence your credit score and shed light on how to improve your number.
What’s in your credit score?
Your Payment History:
- This refers to the record of your payments on credit accounts.
- Timely payments positively impact your credit score.
- Late payments, defaults, or missed payments can have a negative effect.
The Number of Open Accounts You Have:
- It accounts for the total number of credit accounts you currently have.
- A higher number of open accounts may suggest a higher credit risk because you could be reliant on credit
Characteristics of your credit profile:
- Your credit score can factor in personal details such as your age, length of employment, and length of time at your current address.
- The age of your credit file can affect your credit score.
The Type of Credit Facilities You Have:
- Different types of credit, such as credit cards, mortgages, or secured loans, contribute to this factor.
- The mix of credit types can influence your credit score positively, showing diverse and responsible credit usage.
The Length of Your Credit History:
- This considers how long your credit accounts have been active.
- A longer credit history can positively impact your score as it provides a more extensive financial track record.
The Amount of Open Unsecured Debt You Have (Credit Cards, Buy Now Pay Later facilities)
- It reflects the total outstanding debt on unsecured credit accounts, like credit cards and buy now pay later services.
- High levels of unsecured debt relative to your credit limit may negatively impact your credit score.
- Paying your cards out each month or owing less than 50% of the credit limit shows responsible lending and positively impacts your credit score.
Hard Enquiry versus soft enquiry:
- There’s a difference between “hard” and “soft” inquiries.
- Hard inquiries, such as applying for a loan or credit card, can have a temporary negative impact on your score.
- Soft inquiries, like checking your own credit score, does not affect your credit score.
The Type of Credit Enquiries You’ve Made:
- The number of points deducted per enquiry varies based on the type of credit facility you’re applying for. Different types of credit may have different impacts on your score.
- Payday loans, BNPL facilities will deduct more points than a secured credit facility
The Number of Enquiries You’ve Made:
- This refers to the total number of enquiries on your credit file
- Multiple recent inquiries within a short time can suggest a higher credit risk.
Your Used Credit vs. Your Available Credit:
- Known as credit utilisation, it compares the amount of credit you’re using to the total credit limit available.
- Lower utilisation (using less of your available credit) generally has a positive impact on your credit score.
- Higher utilisation may suggest financial strain and could negatively affect your creditworthiness.
Defaults, Serious Credit Infringements, Bankruptcies, and Court Judgements:
- Defaults, serious credit infringements, bankruptcies, and court judgments are considered high-risk indicators & can significantly and adversely impact your credit score.
Want to find out how you can improve your credit score? We explore 10 ways on how you can better your credit score.
