Do have you have ever wondered just how is your credit score calculated?
When you check your credit file with a credit referencing agency, you will also get a credit score which is a numerical score. Each credit referencing agency has their own way to calculate your credit score so it may vary depend on who you choose to use. However, they usually use very similar underlying factors to calculate your credit score.
The three main credit referencing agencies in the UK include TransUnion, Equifax and Experian. If you haven’t already checked your credit or don’t know what your credit score is like, you can check your credit online for free. In general, performing a credit check does not harm your credit score and gives you a clear understanding of your finances.
How is your credit score calculated?
What factors affect your credit score?
There are a few main factors which are used to calculate your credit score. The factors which help to calculate your credit score are usually:
One of the main factors which calculates your credit score is your credit history and repayments. Having difficulty in the past making your payments on time and in full can negatively affect your credit score. Your credit score tries to predict what your lending will be like in the future too so if you have had payments in the past which you have not kept up to date with then lenders may be reluctant to offer you finance.
Your credit file will host information about you such as your personal information. Information registered on your credit file includes your name, address, age, family and living situation. Lenders use this information to help get you approved. It’s also a good idea to register on the UK electoral roll as it can be shown on your credit file. Lenders can also use the electoral roll to verify that you are who you say you are and help get you approved quicker in some cases.
How is your credit score calculated?
Hard search enquiries
When you make a hard search enquiry on your credit file, usually from applying for credit or finance. A hard search is recorded on your credit file and can negatively impact your credit score if you make multiple applications for finance in a short space of time. Many car finance brokers use a soft search, so you don’t have to apply multiple times with different lenders. A car finance broker can then match you up with the most suitable lender from a wide lending panel. A soft search application isn’t recorded on your credit file and doesn’t impact your current credit score. If you are applying for finance, you will usually be notified before a soft or hard search is performed on your credit file.
Things that don’t affect your credit score
There are many misconceptions around credit scores and what is recorded on your credit file. There are a few factors which are common myths that surround your credit file and what impact they have to your credit score.
Many people believe that your income and how much money you have affects your credit score. This is not true; your credit file is about how much you borrow not how much you earn. If you are applying for finance, lenders may ask for your bank statements and how much you earn each month, but this is just to pass an affordability check to make sure you can repay what you are wanting to borrow from them.
How old you are doesn’t directly affect your credit score. You will have to provide your age for many types of loan or finance as most agreements are a legal document which require you to be 18 years old to get accepted. Your age doesn’t direct affect your credit but usually as you get older, you will apply for more forms of credit. If you haven’t taken our any credit in the past, then you may assume you have good credit. However, with no credit history, lenders can predict what type of borrower you will be which can harm your credit score. You could try a credit building card to increase your credit score.
How is your credit score calculated? is a feature post