Factors that affect your credit score

Credit scores are a complicated business. No-one has a universal credit score. This means there’s no rulebook to tell you how many credit points are lost and won with everything you do financially. Instead, we’re going to talk about the factors that may affect how lenders view you, and how these, in turn, impact your credit score.

Every time you make an application for credit, an enquiry will be carried out on your credit report and a mark will be left on your file.

Making an occasional application for credit won’t make much of a difference to your credit score. However, if you make several applications in a short space of time, or if you’re rejected for credit, it’s likely to have a negative impact on your score.

If you want to limit the number of enquiries on your report, you can check your eligibility for a credit product by carefully reading the criteria before you apply.

TIP: Don’t panic if your credit score dips when you’ve applied for a new credit card. If you start using your new product responsibly then your credit score should go back up relatively quickly.

It's no surprise to learn that banks and lenders like to know that the people they lend to are reliable and stable, and therefore can be trusted to repay any debts. One way to determine stability is to look at the age of your credit accounts. So, they like to see that at least one of your credit accounts has been held for several years. This not only proves who you are, but shows you’ve been trusted by another lender over a long period of time. It’s likely to have a positive impact on your credit score if you have an older credit account on there. If your credit accounts are all mostly new this could lower your credit score.

If you miss a payment or pay late on a debt, this will be marked on your credit report and it’s likely to have a negative effect on your credit score.

If you miss several payments your lender may place your account into ‘default’. Every lender will have different rules for how many payments you’re allowed to miss before you default. Some will allow you to miss up to 6 payments but for some lenders you may only be able to miss 2 payments before you are declared in default.

Defaulting on a payment carries a much heavier penalty on your credit score than missing a payment.

Missing and default payments will be marked on your credit report and will stay there for 5 years (the maximum time your credit information is held for).

Remember, it’s never too late to pay back a debt. It will always look better on your credit report to pay down a defaulted account – even if the payment is late and it isn’t for the full amount. It will demonstrate to lenders that you’ve tried to make up for the defaulted payment, and this is always preferable to never paying a debt back at all.

Ideally, you should try to keep your credit repayments between 20% and 30% of your income.

Other factors relating to your credit limit may also affect your credit score. For example, if you have one credit card with a relatively high credit limit, this may have a positive effect on your credit score as it shows you’re trusted with this level of credit.

If you have a court judgement, admin order or a sequestrian against you, this information is on the public record and becomes part of your credit report.

If lenders see any of these items marked on your report, it will have a negative impact on your credit score and it’s likely lenders will be less willing to lend to you. This is because your record shows you’ve gone back on some form of financial agreement in the past.

If you do have one of these on your record, make sure you comply with any rules or restrictions you are given. If you ignore what is asked of you, it can have more serious and permanent consequences on your credit score.

Once your debt is back under control, using a credit builder credit card very carefully will help you rebuild your credit score.

If you don’t have any active credit accounts – i.e. ones that you’re currently using - this may have a negative impact on your credit score. The reason for this is that lenders have no current information about your ability to borrow money and repay it reliably, and therefore you may be seen to be a greater credit risk.

If you have no credit history you may struggle to be approved for credit in the first place (a bit of a chicken and egg situation). There are credit cards out there that might be able to help you if you’re in this situation – credit builder cards – which, if you use responsibly, could help you build up your credit score.