April 30, 2025
Factors That Do And Do Not Affect Your Credit Rating
By : Ellie Brown
A credit score is a three-digit number that reveals information about your financial credibility. The higher the score, the lower the interest you will qualify for. Your credit rating speaks volumes about your financial commitment. If you discharge all your debts on time, your score will undoubtedly be high. Lenders are more likely to approbate applications with good credit ratings. If your credit score is not so stellar, you would be able to apply for loans for bad credit, but they will charge you high interest rates.
Financial experts emphasise a stellar credit rating as it increases your chances of borrowing money at affordable interest rates. Now, the question is what factors are taken into account to determine your credit rating.
Here are some factors that have a direct impacton your credit rating:
1. Payment history
You all know that payment history is a prominent factor. Payment history makes up a large percentage of your credit score. It amounts to 35%.
Lenders would want to see whether you have been clearing your dues on time in the past. Missed payments and defaults will make you perceived as a highly risky borrower. So, whether it is a small loan or a mortgage, you should pay down all your debts on time. If your financial conditions are turned upside down, you should wait until you fall behind on payments. You should instead talk to your lender to see if they can revise your repayment plan and preclude you from falling into debt.
2. Length of credit history
Credit history insinuates how well you managed debt payments previously. If you have a thin credit history, it would not suggest enough to your lender about your financial commitment. For instance, if you took out a personal loan in the past and you paid it off on time, this cannot suggest much about your financial behaviour.
A strong credit history is influenced by the range of credits you have and the age of each credit. Having an account for a long time suggests that you can manage payments despite the ups and downs in your financial circumstances. Bear in mind if you have similar types of credit, such as payday loans, bad credit loans, and other small emergency loans, they will not help you determine your commitment because they are paid off once and for all within a short period of time. They do not give much account about your loyalty and commitment.
3. A range of credits
Another important factor to focus on is the types of credits. Lenders want to check your capability to handle multiple types of loans. If your credit report gives an account of multiple types of debts, such as small loans, personal loans, and credit cards, your lender would conclude that you have the capacity to manage multiple types of debts.
Hard inquiries are made every time you put in a loan application. They pull your credit points. Fortunately, their impact is fleeting. Your score bounces back after you make a few payments on your debts.
Some lenders who provide small emergency loans run soft credit checks. They are not recorded on your credit file. Soft credit checks do not pull your credit points. When you apply for a personal loan or secured loan, no lender can make the lending decision without hard checks.
4. A credit utilisation ratio
It refers to the amount you owe against the available credit. The amount you owe accounts for 30% of your credit score. Experts enjoin that you must not exhaust more than 30% of the total available limit.
If your credit report is not impressive and you are looking to improve your credit score, you should try to reduce it to 25%. The lower the ratio, the better.
5. New credit
Be careful while applying for a new loan. New applications account for 10% of your credit score. Applying for a new loan within a short period of time would lower your credit score because this suggests that you are always relying on loans to meet your needs. Your budgeting skills might be poor and chances are you will struggle to repay the debt if approved.
Other important things to keep in mind
1) Joint accounts
Many of you do not realise that opening a joint account with your partner could negatively affect your credit rating. If your spouse fails to meet their obligation, you will have to discharge the whole debt.
Having your account linked to someone with a bad credit rating is not good. In the future, whenever you apply for a loan, this would get in your way of obtaining lower interest rates. Try to avoid linking your account with anybody with a bad credit rating because such accounts will show on your credit report.
2) Credit score varies by agency
There are three credit reference agencies that keep a record of your credit. Lenders do not report to all agencies, so it is likely that your credit file varies. Yet, you should carefully check your credit rating from all three agencies. Chances are all details are accurate that Experian provides, but there is a reporting of unidentified accounts to Equifax. You should carefully check your credit details from all agencies.
It is entirely up to lenders which agency they will contact to get a copy of your credit file, but most of the lenders in the UK consult Experian credit report. Having found an error in your credit report, you should immediately dispute them. Your agency will contact your lender first and then alter information if needed. It might take at least a month to fix your credit score.
Factors that do not affect your credit rating
1. Checking your credit score
A credit score check pulls your credit points because hard inquiries are recorded on your credit report, but this happens when you apply for a loan.
You will never lose your credit pointsdespite checking your credit report multiple times. It will remain the same. Credit bureaus provide a free copy of your credit report once a year. You should keep checking your score periodically so you know there is no erroneous information and unidentified accounts.
2. Distant mistakes
It is worth noting that late payments and defaults are recorded on your credit file, but they disappear after two and six years respectively. Lenders are normally concerned about recent information. For instance, recent defaults and late payments will affect their decision to lend you money, not defaults five years old. If your credit score is not so good, you must try to ensure that your credit score does not become worse. Lenders do not bother about too old mistakes.
The bottom line
There is no doubt that you must have a good credit rating to avail yourself of a loan with lower interest rates. The most prominent factors that influence credit rating are payment history, credit balance, credit mix, new credit, and the length of credit history.
There are some factors that do not affect your credit score. They include self-checking of a credit score and old mistakes. Keep your credit rating in good condition so you do not struggle to qualify for competitive interest rates.