If you’ve never heard of the term credit score, chances are that you’ve never sought for a loan or simply lives under a rock. In a world where credit has become so pervasive, understanding what makes up a credit score is of paramount importance. Every once in a while, we might need a cash injection from financial institutions to purchase a home, start a business or even go for higher education. When this happens, how good your credit score is the difference between you getting the loan and being denied.
Simply put, a credit score is a numerical number used by various lenders to ascertain how credit worthy you are. The numerical number is essentially based on your credit report that is prepared by various credit bureaus across the UK such as Experian, TransUnion and Equifax. However, it’s important to note that scores from the 3 credit bureaus aforementioned are never the same. This is because formulas for arriving at a credit score are not universal and that is why there is always a slight difference between your credit scores as formulated by various bureaus. When seeking to borrow money, your lender might refer to only one credit bureau or all 3 of the above in the UK.
Ever wondered what makes up your credit score? If yes, we are going to take a look at 5 things that have an impact on your credit score as a person.
- Payment history
Your payment history makes up approximately 35% of your credit score. It all boils down to how timely you make your payments. Do you default on payments, bankrupt and always pay bills beyond the due date? If yes, then you will have a very low score. On the other hand, timely repayments work in your favor and positively impact your score.
- The amount of money you own
The money you owe makes up 30% of your credit score. The deeper you are in debt, the worse your score is. Credit bureaus look at how much you owe on your various accounts, the number of accounts under your name with accompanying balances and how much credit you have. It’s advisable that you consume only 30% of the credit you have as it positively impacts on your credit score. For instance, if you have credit of say $2000, it would be prudent to have a balance of $600 on your card.
- Period credit has been in use
This makes up 15% of your credit score. The lengthier your credit history is, the better it is for your score. However, this does not mean that you can’t get a good score in a short period of time. As such, if you are to cancel a credit card, ensure it’s not one that you’ve held for a long period of time.
- New lines of credit
Interestingly, seeking for new lines of credit can negatively impact your credit score. It makes approximately 10% of the score. However, the impact is not so big. Basically, when you inquire for new credit, lenders make inquiries on your credit report and this can inadvertently hurt your score. The logical thing to do therefore would be look for new credit within a given timeline say 30 days so as not to negatively impact your score.
- Types of credit
Types of credit you have can also negatively impact your credit score though on very low level. In essence, having different types of credit such as auto loan, student loan or mortgage loan is instrumental for your score.
Being conversant with all the aforementioned gives you an idea of the measures you need to take in order to ensure that your credit score is good. It’s all about avoiding pitfalls, making timely repayments and periodically checking the status of your credit report. After all, a healthy credit report is good news when you urgently need credit for whatever purpose.