What Impacts Your Credit Score, And How You Can Overcome It?

The credit score is one of the more daunting concepts to many people in the UK, and also one of the most misunderstood. Indeed, the lack of understanding around credit scores and how they work is a significant contributing factor to financial illiteracy and the difficult financial situations that can result.

Put simply, your credit score could be the difference between being accepted for a mortgage and being rejected for a simple three-figure overdraft. Here, we’ll go into a little more detail about what exactly that means for you – and what you can do to reverse course on a bad credit score and its results.

What Is A Credit Score?

First, let’s clear up some common misunderstandings about the credit score as a concept. There is no singular credit score, and no singular arbiter of what constitutes a good or bad one. Rather, the term comes from an at-a-glance evaluation of your history with borrowing and repaying money, as compiled and interpreted by one of three major independent credit reference agencies: Experian, Equifax and TransUnion.

Whenever you approach a bank, building society, credit card company or similar lending institution with a request to engage with a financial product, be it a credit card, overdraft, loan or mortgage, those institutions will speak to one of these credit reference agencies to find out how reliable you are with credit. The better you are at paying back debts, the less risk you pose to these institutions, and the more likely they are to approve you. You may even be offered better terms for your low-risk nature.

Factors That Negatively Affect Credit Scores

It isn’t just your history with debt that makes up your credit report and resulting ‘score’, though. Your history with respect to debt and repayment will be taken into account, but so will your living situation and employment history, as well as other factors. These are effectively used to build a picture of the risk you pose as an investment; bear in mind that financial products earn the institutions that offer them profit through interest.

Practically speaking, then, what makes for a bad credit score? The most obvious examples would be late payment or debts, or failure to pay debts within terms; it may surprise some of you to learn, though, that a lack of credit history can be just as damaging to your credit score as a chequered one. With no history to draw on, lending institutions will find you an unknown quantity and, hence, high-risk.

Improving Your Credit Score

So, what can you do to positively impact your credit score? In the case of having no credit history to speak of, you can start creating one. A credit building card can be used for daily expenses and immediately paid off, to enable you to build a history of timely debt repayments without much in the way of risk. Registering on the electoral roll can also help in this regard.

More generally, keeping a decent credit score is a matter of making good habits. Paying off debts sooner and more frequently will help you build back up from a poor score, as will refraining from maxing out on further credit options available to you.