Debt Reality Check: Factors Affecting your Credit Score

Are you looking for a loan but you’re worried about being rejected? As you may be aware, one of the things that loan providers use when judging your application is your personal credit score.

This is a rating calculated and recalculated all the time based on your behaviour as both a borrower and a consumer throughout your life. Credit scores can be very complicated for people to understand because there are no common guidelines to tell you how many credit points you’re going to win or lose with everything you do – every credit report agency does this their own way.

Different lenders will also have their own idea of what a good credit score is which means you could be easily accepted for a loan by one lender and rejected by another with the same score.

So, while your credit score will vary between agencies and it will be treated differently by each lender, you know you’ll need to do everything you can to make it as high as you. This will impact well on how potential lenders see you; making it much more likely that you’ll be accepted for credit.

Here are the top factors that will make up your credit score, and how important each aspect will be.  

Your bill payment history – 35% of your credit score

Your record of making payments makes up 35% of your credit score. In fact, how quickly you pay your bills is the single largest factor that lenders will consider.

If you’ve been late with repayments or have failed to repay debt for any reason in the past, then this can negatively impact your credit rating. This could include:

  • Missed payments — Skipping a payment will always look bad on a credit report, whether you caught up with payments again very soon or not. Missed and late payments can stay on your credit history for as many as six years so please make sure you always pay on time.
  • Charge-offs — In some cases, when a creditor decides they won’t be able to recover the money that you owe them, they may write off your account as a loss. Your charged-off account will be closed for future use, meaning you won’t be able to borrow from that lender again.
    The lender may also choose to report the balance you owe, which will put a black mark next to your name when you come to apply for credit through other providers. Your lender may also choose to sell your charged account to a collection agency to recover the debt.
  • Collection agencies — If your lender feels they cannot recover their money from you themselves, they may ask a collector to try to make you pay or they may sell the debt to the collection agency outright.
    Either way, having a collection agency takes over your case looks bad to lenders and this fact may even stay on your credit report for seven years.
  • Settled accounts — If you are having trouble repaying your loan, your creditor may agree to accept less than the whole amount you owe them. This would mean your debt is considered settled.
    Whilst this may not cause serious problems between you and your lender, it still means you did not repay the debt as agreed. For this reason, this could still reflect badly on you in your credit report.
  • Repossession — As with settled accounts, it can still impact your credit score if a lender has to find different means of recovering the debt.
    If you take out a secured loan, and your creditor reclaims the collateral you put down such as a car purchased with a log-book loan, then this will still show up on your credit report.
  • Bankruptcy — Should you reach a point where you are unable to manage all of your debt, you may be forced to declare bankruptcy.
    Filing for Chapter 7 bankruptcy means that none of the debt you still owe gets paid. This will show up on all credit searchers future lenders carry out for ten years.
    If you were to file Chapter 13, then you would still repay a portion of the total amount you owe; with the information remaining available on your credit file for only seven years.

From this, you can see just how important making timely repayments on all loans and bills can be to your overall credit score.

The amount of debt you already owe – 30% of your credit score

Your level of debt will determine a further 30% of your credit rating.

Lenders will look at the total amount of credit you have available to you based on credit card limits. They’ll then compare this to the amount of credit you actually use, such as through bank statements and credit card balances.

This is used to work out your credit card utilization. A low credit utilization ratio shows your ability to manage your finances well, which is why loan providers prefer you to have a ratio of 30% or less.

Having high credit card balances will have a major negative impact on your credit score. But the good news is, as long as you continue to make timely repayments on your debts, your credit score will start to improve over time.

The length of your credit history – 15% of your credit score

Stability is something all lenders will be looking for in deciding whether to accept you for credit, which is why the age of your accounts is an extremely important factor in determining your credit score.

Age of credit makes up a considerable 15% of your total credit score proving you have experience in handling credit responsibly. Many don’t realise that opening up new accounts or closing their existing ones can actually lower your credit rating over time.

That’s why it’s generally not recommended that you open several new accounts at one time. Rather, it may be wiser to keep using your existing accounts for as long as possible to show lenders that you are a responsible borrower.

Applying for new credit and number of enquiries– 10% of your credit score

You may have heard about credit searches, but what does it really mean for your credit score?

Every time you apply for credit, the lender will need to perform a complete credit application search on your credit report; leaving a lasting footprint on your file.

This footprint can then be seen by all other lenders you apply to in the future. Whilst the occasional application won’t make much of a difference to your credit rating, if you have too many hard searches on your file, if the searches are too close together, or if you get turned down for credit a lot, this will make lender suspect you have trouble managing your finances.

This can make things difficult when it comes to find a lender that will accept you. Fortunately, when you apply for credit through a broker like LoanTube, you’ll only need a soft credit search on your file to narrow down your options and later before the final approval for a loan, a complete credit check will be performed Please note that there is no such thing called No credit check loans.

Your types of credit in use – 10% of your credit score

There are two main types of credit accounts; revolving accounts and instalment loans. When you have a variety of these kinds of credit on your record, it shows lenders you have experience in managing different kinds of credit.

Whilst many are unaware that this can affect your credit score, the types of credit accounts you use make up a whole 10% of your credit rating.

One method that could boost your credit score is by having loans for certain assets, such as your home or car, and personal or student loans paid in monthly instalments, as well as credit and charge cards to prove credit diversity.

Factors That Don’t Affect your Credit Score

It is likely you’ve been told about a number of other things that can influence your credit score that actually don’t. Some common misconceptions of factors which impact your credit rating include:

  • Your income
  • Bank overdrafts
  • Insurance
  • Paying child support
  • Utility and mobile phone payments
  • Checking your own credit through sites like Experian
  • Your age
  • Credit counselling

Whilst these may not affect your credit score directly, things like your level of income, employment status, and age will often need to meet each lender’s individual criteria for you to be accepted for a loan.

That’s where LoanTube comes in.

Find your Perfect Loan with LoanTube

At LoanTube, we work with a panel of expert lenders from across the UK who looks more at the person that they do a credit score.

How does it work? Our clever computer system compares real-time offers made direct by payday lenders. This is all done in real-time and, once we’ve got all the quotes, we present all these offers with their terms and condition to you, to be able to take an informed decision. And all this happens in real time.

To start your application, please click here.

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