#TuesTips -What really impacts your credit report?
What is a credit report?
In simple terms, your credit report is a tool used by lenders to determine if you qualify for credit such as loans,mortgages or similar services. It helps to indicate what kind of borrower you are; if you would be a risk or if you’re likely to manage your repayments. Your credit report contains information such as your personal details, credit account history and public records. When applying for credit, you are giving lenders access to your credit report – this is a part of the application process they use to determine your eligibility. All lenders have different requirements and so they assess your score based on their own criteria. They will set a minimum that you need to reach in order to qualify for your desired amount of credit.
What is a credit score?
All the data on your report contributes to the calculation of your credit score, which is just a number that shows lenders your creditworthiness. Typically, credit scores range from 300 to 850 and the higher your score, the more likely you are to receive credit from lenders. Behind the number itself, there are some main factors that are considered during the decision-making process and therefore it’s important to know what affects your score so that you can stay in control of yours and even make improvements over time.
What is considered a good or average score?
There is no specific number that will guarantee you approval. Also, due to different lenders having different requirements – you could be refused by one company and accepted by another with exactly the same credit score. Also, different credit rating agencies calculate scores in different ways, giving different results.However, most companies view a ‘good’ score as being somewhere between 881 and 960. A ‘fair’ score could be 720 to 880.
How does my credit score affect my ability to receive credit?
Your score, along with the information in your credit report are key ingredients in determining if you are eligible for credit such as loans, credit cards and mortgages. Overall, higher scores reflect a better credit history, making you suitable to receive loans with lower interest rates.
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So, what are the main factors affecting your credit score?
1. Hard Searches: Each time you apply for any form of credit, a hard search is carried out on your report. Although the occasional application won’t have much affect on your score, a large amount of applications in a short amount of time will most likely have a negative impact.
2. Soft Searches: These will give you an indication on which products are worth applying for and won’t affect your credit score,limiting your chances of disapproval.
3. Stability: It is important for lenders to see you as a stable and trustworthy borrower. The three main ways they check your reliability are how long you’ve lived at your address, the average age of your credit accounts and if you’re registered to vote.
4. Missing payments: Missing a payment is likely to leave a negative mark on your credit report. Most companies are aware that this sometimes happens, so it isn’t the end of the world. If, however, you miss enough payments to default on a debt, the penalties are a lot more serious and this information can remain on your report for up to six years.
5. Credit limit: Your credit utilisation has an affect on your score. For example,if you use too much of your total credit limit, it could damage your score.Lenders may also consider this when assessing your credit worthiness, it’s a good idea to keep it below 30%.
6. Public records (CCJs, IVAs and Bankruptcy): Having any court judgements/voluntary arrangements against you or having a bankruptcy in your past will cause this to appear on your report for around six years and lenders will automatically mark you as less creditworthy. If you are in this kind of situation, you should try to act in accordance with any restrictions you may be given, to avoid your circumstances getting any worse.
7. Mistakes on your report: Even the most minor mistake on your report can have a huge impact on whether you will be accepted for credit or not. Therefore, it is always good to double check for any typos or spelling mistakes. Also, check for any leftover details of previous addresses or accounts, especially those where you were linked to other people –your credit file may still have connections to them.
8. Increase your score with use of credit: It can be difficult starting if you aren’t currently using credit or if you have no credit history; lenders have limited information to assess you on. In this case, you should consider applying for a credit builder card, which will help you up your score over time.
How can I improve my credit score?
You can improve it in many ways over time and an most obvious way would be to build your credit history. If you have little or no credit, it’s much more difficult for lenders to assess you during the review process as they don’t have much to go off. This is most common in young people or people who are new to the country. For those people,using a credit builder card is always a good idea but only if they make the necessary repayments to the card issuer or else they will damage their credit score.
Another way you can better your score is by proving where you live, make sure you’re on the electoral roll -you can still do this if you live with your parents or in shared accommodation.
A great way to improve your credit score is to make payments reliably. Bills such as phone contracts, rent or any regular monthly payments should all be paid in full and on time, this will gradually up your score. Direct debits are a way many people ensure that they do this.
Lastly, keep your credit utilisation low. This is the percentage of credit you use, out of your total credit limit.For example, if you have £4,000 credit limit on a card and you have used £2,000 of that, your percentage is 50%. A lower percentage is usually seen positively by companies and as a result, will increase your score.
For further information on your credit report or for access to your own detailed report, please visit https://www.creditknowledge.co.uk/. With Credit Knowledge, you will have a 3 - day free trial*after which, you will be charged £19.99 per month.