What affects your credit score?

Martin Lewis provides advice on how to boost credit scores

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Throughout your life, credit scores will play a vital role in the financial products you take out. For example, when you’re applying for a mortgage, your credit report will be used to help determine whether you’ll be able to keep up with repayments and if your application will be accepted at all. The higher your credit score, the more you’ll be seen as a low-risk individual and the more money you’ll be able to borrow. It is also worth remembering every lender follows a different policy for credit scoring.

So that means even if you don’t meet the criteria of one lender, you could still be able to get credit from someone else.

However, it’s essential you find out exactly why you were turned down before making another application.

You should also be aware that too many credit searches in a short space of time could be viewed negatively by lenders.

Credit scores are given in the form of a number between 300 and 850, which is used to depict your credit-worthiness.

What affects your credit score?

While the exact criteria used by each scoring model varies, these are the most common factors that affect your credit score.

Payment history

Payment history is the most important ingredient in credit scoring, and even one missed payment can impact your score negatively.

Lenders want to be sure that you will pay back your debt on time when they are considering you for new credit applications.

Payment history accounts for 35 percent of your FICO score, which is the credit score system used by most lenders.

Accounts owed

Your credit usage, particularly as represented by your credit utilisation ratio, is the next most important factor in your credit scores.

Your credit utilisation ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits.

This ratio looks at how much of your available credit you’re using, and can also give a snapshot of how reliant you are on credit and other non-cash funds.

Using more than 30 percent of your available credit is a negative to creditors, and again, credit use accounts for 30 percent of your FICO score.

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Credit history length

How long you’ve held credit accounts will make up 15 percent of your FICO score.

This includes the age of your oldest credit account, the age of your newest credit account and the average of all your credit account ages.

Generally, the longer you can demonstrate a credit history, the higher your scores will be.

Credit mix

People with top-up credit scores often carry a diverse portfolio of accounts, which could include a car on finance, credit cards, student loans, mortgages and other products like them.

Credit score modelling considers the types of accounts and how many of each you have, which is then used as an indication of how well you’ve managed a wide range of products.

Credit mix accounts for 10 percent of your overall FICO score.

New credit

The number of credit accounts you’ve recently opened, as well as the number of hard inquiries lenders make when you apply for credit, account for 10 percent as well.

Too many accounts or inquiries can indicate an increased risk, and as such, hurt your credit score greatly.

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