What Can And Cannot Affect Your Credit Score?

December 5, 2022

Credit scores are one of the first things which are mentioned when you start to look into the process of buying a house. They are important, but most of us are a bit vague about how they are compiled, and which factors do and do not affect our credit score. Here’s a look at some of the facts and misconceptions.

What is a credit score?

A credit score is a number which represents your creditworthiness—that is, how reliable you are at repaying loans and paying your bills on time. It’s made available to lenders, so that they can assess what level of risk you represent to them. The higher your credit score, the more likely you are to be offered a loan with favourable interest rates.

How is your credit score complied?

A record of your financial activity is tracked and filed by credit reference agencies (CRAs). There are three main credit reference agencies in the UK: Experian, Equifax and TransUnion. They each use slightly different criteria and numerical systems to work out your score, so there is no single figure which applies across the board.

You can check your credit score for free using online apps, and some banks also allow you to check for free. Some companies may charge a sign up fee to access your score, but they offer features which help you budget and track your expenditure.

Which factors do affect your credit score?

Red flags on your credit history are caused by late or missed payments, unpaid debts, County Court Judgements (CCJs), bankruptcies, Debt Management Plans (DMPs) or Individual Voluntary Agreements (IVAs).

Some issues are considered less serious than others. For example, one or two late payments will not be a major issue for most lenders, if you have since demonstrated a pattern of responsible financial performance. However, a continuous string of missed payments for six months or more will be flagged up by most lenders.

If you have had more serious problems with your finances, and have a CCJ, DMP, or IVA on your file, then you are likely to have problems when you need to apply for a loan. However, it is still possible to get a deal from a specialist lender, who may offer higher interest repayments, or require a larger deposit, if you need a mortgage.

Bankruptcies are considered the most serious issue by most lenders, and you will need to wait at least 12 months after being discharged before the majority of lenders will consider your loan or mortgage application.

Other issues which can affect your credit score include not being on the electoral roll, as this is one method CRAs use to verify your identity. Sometimes, simply having no credit history can lead to a poor score, because there is nothing to base the score on. This can happen to young people who still live with their parents.

Which factors do not affect your credit score?

Your salary does not affect your credit score, contrary to popular opinion. Earning more may mean that you have less trouble paying the bills, but you can be on a low wage and still have a good score, if you are financially responsible and don’t overspend.

On the other hand, you can have a great salary but still have a poor credit score, if you live beyond your means and don’t budget for the essentials, such as utility bills. Claiming benefits does not affect your credit score, as the CRAs do not have access to this information, nor are they allowed to access your medical records.

If you are closely related to someone, or live with someone with a poor credit score, this will not affect your own score, unless you have joint accounts to pay bills or other shared financial commitments, such as a mortgage.

Your credit history only takes into account the past six years, so if you have had historical issues, these should no longer affect you. The longer ago an adverse credit incident was in the past, the less a lender is likely to be concerned about it, unless it was a very serious problem, such as a bankruptcy involving hundreds of thousands of pounds or more.

Remember that some lenders have more flexible attitudes to your credit score than others. There are specialist lenders who assess applications on a case-by-case basis, and consider any reasonable explanations for adverse financial circumstances.

If you would like to speak to bad credit mortgage brokers in the UK, please get in touch with us today.

Your home may be repossessed if you do not keep up with your mortgage repayments.

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