What affects credit score negatively? What affects it positively? Are there any key steps you should take today in order to avoid a poor credit rating? Moreover, how can you improve a low credit rating quickly?

In the world of consumer credit scores and their various contributing factors, these are all very common questions. That’s hardly surprising – personal credit can seem a slightly bewildering topic if you don’t really understand how it works. Still, even if you’re not completely versed in the intricacies of credit ratings, you probably know roughly which end of the scale you’re currently sitting at (and, broadly speaking, why).

On the other hand, if you don’t really have a clue what affects your credit score one way or another, then read on to find out a little more.

These 5 things have the biggest impact on your credit score

Being consumer finance experts, here at Duologi we’re often asked ‘what affects my credit score?’. The truthful answer, as you’d expect, is that lots of things affect your credit score, both positively and negatively, in many subtle and not-so-subtle ways.

Still, that needn’t mean you have to think of it all as some massively complex ecosystem that defies understanding to all but the most learned economist. Far from it, in fact – to get a good grasp of your own credit rating and the factors that influence it, there are basically five main areas to keep an eye on.

Key areas that impact on your credit rating

1. Payment history (35% impact)

Your payment history is the biggest single factor affecting overall credit rating. It (hopefully!) shows prospective lenders that you’re not a high risk, and always repaying the full amounts on time is really the only reliable way to achieve this. Even one or two late payments can quickly affect your current score.

Do be aware, though, that a perfect payment record won’t guarantee approval for some loans. Creditors also take into account a whole slew of other impersonal figures, often including whether or not lending to you is likely to make them any profit.

2. The amount you owe, both absolute and utilisation (30% impact)

This is taken into consideration on two levels: absolute owings, and owings as a percentage of the credit available to you (credit utilisation). Obviously, owing a lot over an extended period of time is usually seen as a potential cause for concern.

Moreover, any outstanding debt will have greater impact if it swallows up a high proportion of your available credit. The percentage of available credit that you currently owe is known as your credit utilisation ratio, and it helps give creditors an idea of how reliant you typically are on non-cash funds. Credit utilisation ratios above 30% will often be seen as a negative by certain lenders.

3. The length of your credit history (15% impact)

Having a longer credit history will normally result in a higher overall rating – provided, of course, that it’s been a trouble-free ride. Understandably, lenders will have more confidence in you if you’re able to demonstrate significant experience of successfully managing your borrowing and repayments.

Bear in mind that your credit history is usually calculated as an average age across all your accounts, as well as taking note of both your oldest and newest ones. In short, it generally pays off not to switch your bank accounts too often, and to keep old ones running if you do.

4. New credit applications (10% impact)

Your credit score can often be affected by how many applications for new credit you’ve made recently. Each time you apply for credit, you’ll get a ‘hard enquiry’ (or ‘hard pull’) made against your credit file by a lender searching your history. These will show up on your credit report in subsequent checks.

Having too many of these show up on your report in too short a space of time can negatively impact your overall rating. This is because repeat applications and hard enquiries imply an elevated level of risk (i.e. financial problems) that could be driving your increased borrowing.

5. Types of credit on your file (10% impact)

Having a more diverse ‘credit mix’ can result in a higher score only ever taking out one type of loan, and always paying it off in the exact same way. In essence, showing you’re able to successfully manage a mixed portfolio of revolving credit and instalment credit will again make you a more attractive prospect to most lenders.

‘Revolving credit’ includes things like credit cards, which have monthly minimums but are otherwise open-ended. ‘Installment credit’ covers things like Buy Now, Pay Later and 0% Customer Finance loans , with fixed repayment dates and a set duration for the total agreement.

Duologi’s top tips for building up a great credit score

DO

• Borrow only what you can afford, and repay on time – if you can’t pay on time and in full, always talk to your lender and agree to pay something
• Repay any outstanding debts before applying for new credit
Use less than 30% of your available credit at any one time
• Check your file for mistakes (no, ‘soft enquiries’ made by you don’t affect your score – in fact, only you see them)
• Register on the electoral roll, with a stable address
• Keep old accounts running where possible, even if they’re not particularly active
• Make successful use of multiple different types of credit and repayment agreement, including credit cards.

DON’T

• Borrow more than you can afford or risk missing payments
• Apply for multiple credit loans in a short space of time
• Regularly creep towards the upper limits of your credit agreement
• Frequently move bank accounts – doing so only gives a small temporary hit to your score, but you need it to fully recover in between
• Worry that checking your own credit rating will negatively affect your score
• Assume that a perfect payment history means you’ll always be approved for a new loan
• Take rejections too personally – credit files contain little in the way of identifiable personal detail; assessments are largely based on numbers and probabilities.