Credit scores can seem trickier to understand than they are, particularly if you’re trying to figure out what has an impact on yours.
However, it’s a lot easier to understand than you think, as there are five factors used to calculate the number. Furthermore, there are things that specifically and directly can have a negative impact on the score.
In the following guide by Mortgageable we are going to look at both, which will help you improve your credit score.
Common Factors That influence Credit Scores
History of Your Payments – by far, the history of your payments is the important factor that affects your credit score. Just one, single missed payment can even affect it negatively. Lenders and financial companies need to know you will be able to and will pay back any money they lend you or that you owe them. They will use this determination when deciding if you are suitable for credit or not.
Mix of Credit Types Used – People who are given higher credit scores normally have an array of different types of credit. Models used to calculate credit scores take into consideration the kinds of credit you have and how many of each are in your name. This mix of your credit helps lenders understand your debt history.
Amount of credit used– Your own credit utilization ratio is figured out by taking the total revolving credit you have now and dividing it by the total credit limits you have. This also gives them an idea of the amount of credit you are using and how much you rely on funds from non-cash sources.
Negative Information – Negative information comes in many forms such as missed payments on your account, accounts in collections or for example if you’ve made an ‘arrangement to pay’ and this has been missed. These can all appear in your credit file and have a negative impact.
Hard Credit File searches – Any time a lender requests information or your credit report when deciding, it is logged in your file as what is known as a hard search. These stay there for around 2 years and often impact your credit score negatively.
So how do you go about improving your credit history? By trying to avoid the following:
Things that Have a Negative Impact on Your Credit Score
Making use of too much credit – When your credit utilization is especially high this sends warning signals to credits that you depend on credit too much. Lenders are generally looking for a credit utilization score of lower than 30% but prefer lower than 10%.
Missed payments – As we’ve already covered, the history of your payments is one of the most vital parts of your credit score. Even if you miss just one payment or have a 30-day late payment, it can have a negative effect on your score. Typically, with one or two payments you should be ok with getting a mortgage in future, however if you’ve consistently missed payments then you’ll likely struggle to get with most mainstream lenders.
Account Defaults – Negative information regarding accounts that can show up on your credit file and play havoc with your scores includes that of any defaults on credit accounts, such as settled accounts, charge-offs, repossession, bankruptcy and foreclosure.
Applying for too much credit in a short period of time – Every time a lender requests to see your credit reports, a hard inquiry is filed on your record (see further up for an explanation). These can affect your score negatively and lenders tend to look for how many hard inquiries have been made. If you’re applying for too much credit too soon, it’s seen as a sign you’re in bad financial health and not suitable for credit.
To see your current credit report, you can sign up for free with the likes of Noddle; where you can get an updated credit report every 7 days.