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1. Payment History
This is arguably the most important factor in building the best credit report you can, and it’s pretty self-explanatory. If you pay your bills in full and on time, you should see your credit score improve.
Likewise, if you have a history of late payments or collection notices, this will be marked on your credit report and is likely to have a negative effect on your credit score.
The lender may also place your account into ‘default’ if you miss multiple payments. Defaulting on debt affects your score more than just missing one payment.
Every lender has different rules when it comes to missing payments; some allow you to miss six payments before placing your account into default, and others allow only two, so make sure you know the rules of each credit line that you have.
The number of negative items on your credit report is important – a higher amount of credit violations will affect your score even more.
You should also note that having recent negative information on your report affects your score more than if the transgressions are several years old. Missing and default payments will be marked on your credit report for up to seven years (the maximum time your credit information can be kept for) but the impact will lessen as time goes on.
What can I do if I have a poor payment history?
- Keep on top of payments and pay bills on time and in full.
- Even if you are placed in default with an account, it’s never too late to pay back debt. Paying back a defaulted account will demonstrate to lenders that you’ve tried to repay the debt, even if it is late and not in full. Paying back late is always preferable to not paying back at all.
2. How close you are to your credit limit
The amount of debt that you carry is the most critical non-payment factor in determining your credit score. Instalment debt (like mortgages and car loans) are taken into account, but the amount of credit card debt you hold is what lenders really look at.
Keeping the amount of credit that you use to under 30% of your limit is typically a good idea. The closer you are to your credit limit, the lower your credit score is likely to be.
Your score could be decreased if you use a large amount of your total available credit, or even too much of a single line of credit.
New lenders may consider how close you are to your maximum credit limit when deciding whether to lend to you, as this could influence your ability to pay back credit on time and in full.
What can I do?
You should carefully manage your credit utilisation. It may be best to spread credit out over a few cards rather than maxing out one card, but each situation is different and you have to make sure that this makes financial sense for you.
Other factors can come into account here. For example, if you have been approved for a credit card with a high credit limit, this could work in your favour and help to improve your score as it shows you are trusted with a higher level of credit. But ideally, you still want to keep your spendings under 30% of the your credit limit.
A general rule to remember is: if you use 30%-75% of your total credit limit this will most likely have a negative effect on your credit score.
If you use over 75% of your total credit limit, it is more likely to have a significantly negative effect on your credit score.
How and when you make your payments and how much overall debt you have are the most important factors in determining your credit score. The remaining ones will affect your score less but are certainly a requirement if you want the highest score possible.
3. Age of your Credit History
If you’ve been managing your credit for awhile now, your credit score is likely to be higher than someone who has just started. The beginning of your credit history is determined by the date the oldest account listed on your report was opened.
Having a shorter repayment history will typically generate a lower score as you’ll have less evidence of your ability to make payments in full and on time.
What can I do?
There’s not much you can do to improve on your credit history, but you can make positive changes now to benefit your future score.
Continue to make payments in full and on time. You also want to keep any accounts that demonstrate good repayment history, even if they’re old. Good history is better than no history.
4. Hard and soft inquiries on your credit report
Every time you apply for credit, you’re giving the lender permission to pull your credit report and score for assessment. Whenever this happens, your credit report will reflect what’s called an inquiry or a hard search.
This is what happens when you apply for a mortgage, loan or credit card and typically, you have to authorise the search.
Each search leaves a mark on your file, and too many of these marks could negatively affect your credit score. To combat this, only apply for credit when you really need it.
In the long term, an occasional application for credit won’t affect your score too much. Several applications all close together is likely to have a negative impact as it could suggest you’re short on cash. This flags to lenders that you may be a higher risk customer (which they don’t typically like and are more likely to reject). Being rejected for credit also lowers your score.
A soft search or inquiry is when a person or company pulls your information as part of a background check. Credit card issuers can check your credit without your permission to see which credit card offers are available to you, and an employer may run a soft inquiry before hiring you, but these don’t affect your score.
Soft searches are only visible to you when you view your credit report, and some credit reporting bureaus don’t even record them as they are not connected to a specific application for credit.
What can I do?
- To limit the number of hard searches on your report, you can check your eligibility for credit by using a ‘soft’ search. These searches will not affect your credit score as they are invisible to lenders.
- Only apply for credit when you need it and are optimistic that you will be approved. Don’t make lots of applications over a short space of time, and use soft searches when you can
- It is common for your credit score to dip when you’ve applied for credit, but if you use your new product responsibly, it typically goes back up quite quickly.
5. Types of credit on your account
It can be a good idea to have credit in different places (mortgage, car loan, credit card) and keep all accounts paid on time and in full. This shows you are a reliable borrower, while diversity in your accounts can be a plus.
If your credit history shows one type of account is dominating it could be a minus for lenders. Don’t take out credit just to improve the diversity of your accounts though, make sure it is a suitable financial decision for you.
What can I do?
- Consider looking into other avenues of credit, store cards or credit cards with certain perks. This could help you reach the best possible credit score.
Here’s a quick recap of each factor we’ve discussed:
- Make payments reliably
- Avoid multiple late payments
- Keep your credit card debt low – under 30% of your limit is optimal
- The longer you’ve had credit – the better
- Don’t apply for multiple loans in a short space of time – only apply when you need to and think you will be approved.
- Type of accounts – diversity is good
New data is being factored into your credit report all the time, so regularly reviewing your information is essential to keep on top of your accounts and your overall credit score.
Compare Club allows you to view your credit report from Experian for free.