What affects your credit score
Updated: Monday, 4 September 2023
A credit score, also known as a credit rating, is a three-digit number that summarises your financial history. It is a way to understand the relative risk of a borrower at a glance.
Whilst a bad credit score isn’t always the be-all and end-all for your finances, being able to borrow money on the most favourable terms can make repayment agreements easier to manage. Having a good credit score indicates a more reliable borrowing history, which can make it easier to access credit.
But what factors can affect your credit score?
In this guide, we’ll explain the different factors that affect your credit rating and, more importantly, how you can make small adjustments to your credit usage to avoid negatively affecting your score.
What factors negatively affect your credit score?
1. Missing payments
A missed payment is different to a late payment, but both will affect your credit score negatively.
Missed payments are when you have completely missed a month’s bill. A missed payment can stay on your credit file for 6 years, so make sure that you only take out credit that you can afford. If you miss several payments, you could be issued with a default notice, and that may have a further impact on your ability to get credit in the future.
A late payment is where you have paid your bill late but before the next billing cycle. Whilst these are not as damaging as a missed payment, late payments still reflect badly on your ability to keep up with repayments reliably.
Note that missed or late payments for utility bills and mobile phone contracts can also affect your credit score.
2. Applying for credit too often
Applying for credit too often can suggest to lenders that you are reliant on credit to get by.
When you apply for credit, depending on the lender they may perform a hard credit check. This is when the lender carries out an in-depth examination of your active credit accounts, bank statements, payment history, and current account status to decide whether to lend to you.
According to Credit Karma, your credit score can dip by a few points following a hard search. Whilst this is temporary, and a single hard search isn’t likely to affect your ability to get credit, multiple hard searches in a short period of time can quickly add up.
Not all lenders use a hard search. For example, we use a soft search at the point of application. A hard search is only made when you decide you’d like to enter into an agreement with us, and contracts are drawn up for you to sign.
Also, think realistically about your chances of getting approved. If you feel it’s unlikely that your application will be accepted, it might be worth waiting until your financial situation is more stable, or looking for lenders who specialise in bad credit finance.
3. Being close to your credit limit
Even though you may have access to several thousands of pounds on your credit cards, it doesn’t mean you should use your full credit limit.
This is because your credit score is affected by your credit utilisation. Credit utilisation is the percentage of credit that you use compared to the amount you have access to.
For example, if you have a £4,000 limit on your credit card, and you are currently using £2,000, that is a credit utilisation of 50%.
Experian recommends that you should use no more than 30% of the credit on offer to you. Using more than 30% could suggest that you are unable to manage the credit you currently have and could reflect negatively on your credit score.
4. Having lots of credit card accounts
You might think it’s handy to have some spare credit or store cards, but having too many credit cards open at once can actually damage your credit score.
There are 3 main reasons why having too many credit cards can impact your credit score:
- You could be using them all close to their limit, which highlights the point above in #3 and can suggest that you are not responsible with credit
- You may not be using them enough, which means there is limited information on your credit report. Lenders check your repayment history for evidence that you can repay credit in full and on time, and having an excessive amount of credit cards can make it difficult for a lender to determine whether you’ll be a responsible borrower
- Opening new credit accounts will reduce the average age of your accounts. According to Lloyds, the average age of your credit accounts can affect your credit score
5. Having little or no credit history
Your credit history is your proof that you are able to manage and repay credit responsibly. You want to show potential lenders that you have a long and consistent track record when it comes to meeting payment deadlines and staying within credit limits.
If you haven’t had any lines of credit, or have little repayment history, credit reference agencies will have no information to use when building your credit report. You’ll likely have a low credit score because there is no evidence that you are a responsible borrower.
Having little or no credit history can make it harder to get finance, so you may need to use a specialist lender if you’re looking for bad credit car finance.
6. Falling into arrears
Falling into arrears means that you have missed 1 or more payments in succession on the same credit account. Like missed payments, falling into arrears will have a negative impact on your credit rating that will remain on file for 6 years, according to Experian.
Beyond having a negative impact on your credit rating, falling into arrears can result in the lender deciding to close your account, leading to defaulted payments and the involvement of debt collection agencies. If you fall behind on car finance payments, you risk losing your vehicle. To avoid this, ensure you only apply to purchase car finance with repayment terms you can meet.
What affects your credit score positively?
1. Ensuring you pay bills on time and in full
Whether it’s on car finance, a credit card, utility bills, or a mortgage agreement, keeping up with any repayment schedules will improve your credit score over the long term.
2. Keeping the same accounts
Using the same bank or credit accounts for a long period of time will show that you are a reliable, stable borrower. The average age of your accounts is a factor that can affect your credit score, so consider whether you think it’s best to keep that spare account open before you decide to close it.
Also, the longer your credit history, the more information that is available for a credit reference agency to include on your credit file. This can positively affect your credit score, but also can help prove to lenders that you are responsible with credit.
3. Only borrowing what you can afford
Late or defaulted payments will damage your credit score. This is why it’s important to only borrow what you can afford to repay.
Responsible lenders will always carry out affordability checks before offering finance, to ensure that any finance offer is affordable for your situation. To get an idea of what your monthly payments could look like for car finance, you could use an online affordability calculator.
4. Setting up direct debits to manage regular payments
Even if it’s just a small amount each month, setting up a direct debit to manage regular payments will help to prevent accidental late or missed payments and, in turn, protect your credit score. Just ensure that you have enough money in your current account to cover the cost each time it’s due.
5. Registering to vote at your current address
Being on the electoral register is an easy way that should improve your credit score. Registering to vote requires you to confirm your identity and prove you live at a particular address which makes it easier for lenders to carry out anti-fraud checks when reviewing your credit application.
What doesn't affect your credit score?
1. Friends and family
Just because you live with friends or family, it doesn’t mean that you are financially linked to them. Even if you live with them and pay rent at the same address, it does not make you financially linked.
You are only financially linked to someone if you open up a joint account or enter a joint finance agreement with them, like a mortgage or car finance. Without any financial link, you won’t impact one another’s credit ratings.
2. Your distant financial past
Most of the information on your credit file will only show for a maximum of 7 years. So, if you missed a payment over a decade ago, this won’t affect your credit score now.
Credit reference agencies focus their scoring on your most recent credit history. Information from your distant credit history shouldn’t affect your score, but recent information will, that’s why it’s important to check your credit report and fix any mistakes or errors.
3. Checking your credit report
Simply checking your credit report will mean a soft search is ran so that you can see the information. Unlike hard checks, soft credit checks do not impact your credit score, so you can check your credit report as many times as you want to ensure it’s accurate.
A soft search is only visible to you and doesn’t leave a visible mark on your credit file that lenders can see. For more information, check out our guide that explains the difference between soft and hard credit checks.
4. Changes in income
Your income is not shown on your credit report, so any changes in earnings will not affect your credit score. This means that receiving Universal Credit or any other government benefits will not directly impact your credit score.
It’s important to note that lenders will ask for your income and employment status as part of making an application. This is to understand if you can afford the credit you are applying for.
5. People who previously lived at your address
It doesn’t matter if the people who lived at your address before were bankrupt or had a CCJ or IVA, as your credit score will not be affected by this. CCJ and IVAs are linked to a person, not just their address.
Your credit report doesn’t link you to people with the same address but just those who are financially linked to you through joint accounts or joint finance agreements.
FAQs about what affects your credit score
Who are the main credit reference agencies in the UK?
In the UK, the main credit reference agencies (CRAs) are:
- Experian
- Equifax
- TransUnion
Each CRA has their own credit score ranges so it might be worth checking your credit score with each of them to understand if you have a good or bad score.
Why is a good credit score important?
Having a good credit score might improve your ability to get credit, and it may help you get more favourable rates. A good credit score can also mean higher credit limits with certain providers since your score shows that you have a good history of being able to manage credit and keep up with repayment schedules.
A credit score, also known as a credit rating, is a three-digit number that summarises your financial history. It is a way to understand the relative risk of a borrower at a glance.
Whilst a bad credit score isn’t always the be-all and end-all for your finances, being able to borrow money on the most favourable terms can make repayment agreements easier to manage. Having a good credit score indicates a more reliable borrowing history, which can make it easier to access credit.
But what factors can affect your credit score?
In this guide, we’ll explain the different factors that affect your credit rating and, more importantly, how you can make small adjustments to your credit usage to avoid negatively affecting your score.
What factors negatively affect your credit score?
1. Missing payments
A missed payment is different to a late payment, but both will affect your credit score negatively.
Missed payments are when you have completely missed a month’s bill. A missed payment can stay on your credit file for 6 years, so make sure that you only take out credit that you can afford. If you miss several payments, you could be issued with a default notice, and that may have a further impact on your ability to get credit in the future.
A late payment is where you have paid your bill late but before the next billing cycle. Whilst these are not as damaging as a missed payment, late payments still reflect badly on your ability to keep up with repayments reliably.
Note that missed or late payments for utility bills and mobile phone contracts can also affect your credit score.
2. Applying for credit too often
Applying for credit too often can suggest to lenders that you are reliant on credit to get by.
When you apply for credit, depending on the lender they may perform a hard credit check. This is when the lender carries out an in-depth examination of your active credit accounts, bank statements, payment history, and current account status to decide whether to lend to you.
According to Credit Karma, your credit score can dip by a few points following a hard search. Whilst this is temporary, and a single hard search isn’t likely to affect your ability to get credit, multiple hard searches in a short period of time can quickly add up.
Not all lenders use a hard search. For example, we use a soft search at the point of application. A hard search is only made when you decide you’d like to enter into an agreement with us, and contracts are drawn up for you to sign.
Also, think realistically about your chances of getting approved. If you feel it’s unlikely that your application will be accepted, it might be worth waiting until your financial situation is more stable, or looking for lenders who specialise in bad credit finance.
3. Being close to your credit limit
Even though you may have access to several thousands of pounds on your credit cards, it doesn’t mean you should use your full credit limit.
This is because your credit score is affected by your credit utilisation. Credit utilisation is the percentage of credit that you use compared to the amount you have access to.
For example, if you have a £4,000 limit on your credit card, and you are currently using £2,000, that is a credit utilisation of 50%.
Experian recommends that you should use no more than 30% of the credit on offer to you. Using more than 30% could suggest that you are unable to manage the credit you currently have and could reflect negatively on your credit score.
4. Having lots of credit card accounts
You might think it’s handy to have some spare credit or store cards, but having too many credit cards open at once can actually damage your credit score.
There are 3 main reasons why having too many credit cards can impact your credit score:
- You could be using them all close to their limit, which highlights the point above in #3 and can suggest that you are not responsible with credit
- You may not be using them enough, which means there is limited information on your credit report. Lenders check your repayment history for evidence that you can repay credit in full and on time, and having an excessive amount of credit cards can make it difficult for a lender to determine whether you’ll be a responsible borrower
- Opening new credit accounts will reduce the average age of your accounts. According to Lloyds, the average age of your credit accounts can affect your credit score
5. Having little or no credit history
Your credit history is your proof that you are able to manage and repay credit responsibly. You want to show potential lenders that you have a long and consistent track record when it comes to meeting payment deadlines and staying within credit limits.
If you haven’t had any lines of credit, or have little repayment history, credit reference agencies will have no information to use when building your credit report. You’ll likely have a low credit score because there is no evidence that you are a responsible borrower.
Having little or no credit history can make it harder to get finance, so you may need to use a specialist lender if you’re looking for bad credit car finance.
6. Falling into arrears
Falling into arrears means that you have missed 1 or more payments in succession on the same credit account. Like missed payments, falling into arrears will have a negative impact on your credit rating that will remain on file for 6 years, according to Experian.
Beyond having a negative impact on your credit rating, falling into arrears can result in the lender deciding to close your account, leading to defaulted payments and the involvement of debt collection agencies. If you fall behind on car finance payments, you risk losing your vehicle. To avoid this, ensure you only apply to purchase car finance with repayment terms you can meet.
What affects your credit score positively?
1. Ensuring you pay bills on time and in full
Whether it’s on car finance, a credit card, utility bills, or a mortgage agreement, keeping up with any repayment schedules will improve your credit score over the long term.
2. Keeping the same accounts
Using the same bank or credit accounts for a long period of time will show that you are a reliable, stable borrower. The average age of your accounts is a factor that can affect your credit score, so consider whether you think it’s best to keep that spare account open before you decide to close it.
Also, the longer your credit history, the more information that is available for a credit reference agency to include on your credit file. This can positively affect your credit score, but also can help prove to lenders that you are responsible with credit.
3. Only borrowing what you can afford
Late or defaulted payments will damage your credit score. This is why it’s important to only borrow what you can afford to repay.
Responsible lenders will always carry out affordability checks before offering finance, to ensure that any finance offer is affordable for your situation. To get an idea of what your monthly payments could look like for car finance, you could use an online affordability calculator.
4. Setting up direct debits to manage regular payments
Even if it’s just a small amount each month, setting up a direct debit to manage regular payments will help to prevent accidental late or missed payments and, in turn, protect your credit score. Just ensure that you have enough money in your current account to cover the cost each time it’s due.
5. Registering to vote at your current address
Being on the electoral register is an easy way that should improve your credit score. Registering to vote requires you to confirm your identity and prove you live at a particular address which makes it easier for lenders to carry out anti-fraud checks when reviewing your credit application.
What doesn't affect your credit score?
1. Friends and family
Just because you live with friends or family, it doesn’t mean that you are financially linked to them. Even if you live with them and pay rent at the same address, it does not make you financially linked.
You are only financially linked to someone if you open up a joint account or enter a joint finance agreement with them, like a mortgage or car finance. Without any financial link, you won’t impact one another’s credit ratings.
2. Your distant financial past
Most of the information on your credit file will only show for a maximum of 7 years. So, if you missed a payment over a decade ago, this won’t affect your credit score now.
Credit reference agencies focus their scoring on your most recent credit history. Information from your distant credit history shouldn’t affect your score, but recent information will, that’s why it’s important to check your credit report and fix any mistakes or errors.
3. Checking your credit report
Simply checking your credit report will mean a soft search is ran so that you can see the information. Unlike hard checks, soft credit checks do not impact your credit score, so you can check your credit report as many times as you want to ensure it’s accurate.
A soft search is only visible to you and doesn’t leave a visible mark on your credit file that lenders can see. For more information, check out our guide that explains the difference between soft and hard credit checks.
4. Changes in income
Your income is not shown on your credit report, so any changes in earnings will not affect your credit score. This means that receiving Universal Credit or any other government benefits will not directly impact your credit score.
It’s important to note that lenders will ask for your income and employment status as part of making an application. This is to understand if you can afford the credit you are applying for.
5. People who previously lived at your address
It doesn’t matter if the people who lived at your address before were bankrupt or had a CCJ or IVA, as your credit score will not be affected by this. CCJ and IVAs are linked to a person, not just their address.
Your credit report doesn’t link you to people with the same address but just those who are financially linked to you through joint accounts or joint finance agreements.
FAQs about what affects your credit score
Who are the main credit reference agencies in the UK?
In the UK, the main credit reference agencies (CRAs) are:
- Experian
- Equifax
- TransUnion
Each CRA has their own credit score ranges so it might be worth checking your credit score with each of them to understand if you have a good or bad score.
Why is a good credit score important?
Having a good credit score might improve your ability to get credit, and it may help you get more favourable rates. A good credit score can also mean higher credit limits with certain providers since your score shows that you have a good history of being able to manage credit and keep up with repayment schedules.
For a better road ahead
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Moneybarn No. 1 Limited is authorised and regulated by the Financial Conduct Authority (Financial Services reference No. 702780)
