You probably know that missing payments can hurt your credit score. But what other, unexpected factors could also have an impact?
We explore what else can affect your score, to help you protect it - and boost your eligibility.
1. Closing a long-standing credit card
Lenders like to see that you have long-standing accounts with a good payment history. This shows that you’re a low-risk, reliable borrower. If you have a good credit history, it may be worthwhile keeping an old credit card open to showcase this. Closing your card could knock points off your credit score, as your credit card repayments would no longer count.
Closing a card will reduce the amount of credit you have available. In turn, the gap between your credit limit and your outstanding balance will narrow. This could give the impression that you’re spending a high proportion of the credit you have available.
Be aware, the nearer you are to maxing out your limit - the riskier you may appear to lenders. They want to know you can afford to pay them back, on top of your current outgoings. To protect your credit score, aim for a credit utilisation ratio of around 25% or less. In other words, aim to spend 25% or less of your available credit limit (e.g. £250 or less out of a £1,000 credit limit). Keeping your credit card open, could help you to achieve this.
Having said that, closing a credit card can sometimes work in your favour. With less credit at your fingertips, there’s less chance of you getting into lots of debt.
Ultimately, you need to weigh up your options and decide what’s best for your personal circumstances. If you do want to close an account, it may make more sense to close a newer, unused one than an old credit card with a good payment record.
2. Your credit mix
You might be surprised to hear that the type of borrowing you have in your name can impact your credit score.
Lenders want to see that you can manage different forms of products, like credit cards, loans and mortgages, for example. So, you can boost your credit score by having a diverse credit mix - and paying them back on time, every time. By doing so, you can show lenders that you’re a reliable borrower, which may give them more confidence to lend to you.
However, you should only take out finance if you need it and you can afford the repayments. A good credit mix may boost your credit score - but only having one or two types of credit to your name shouldn’t make your current score worse.
3. Having a thin credit file
It’s a common myth that if you’ve never borrowed money, you will automatically have a good credit score. This isn’t true. If you have a ‘thin’ credit file with little or no payment record, lenders are likely to see this as a red flag.
If you want to build up a good credit history and score, consider taking out finance (like a credit card or mobile phone contract, for example). The golden rule is to never miss a payment. A single missed payment will damage your credit score and stay on your report for six years. We suggest setting up direct debits for at least the minimum payment, so you stay within your credit limit.
You may think this is a ‘chicken and egg’ situation. How can you get a credit card in the first place, if you’ve never borrowed before? Well, there are several things you can do, for example:
- Get your name added to household bills (like your water bill, for example), so the repayments show on your credit report. Bear in mind that not all utility companies will report to the credit reference agencies.
- Consider a ‘credit-building’ card designed to help those with thin credit. (Bear in mind that these types of cards often come with high interest rates, to offset the risk the lender is taking).
- Join the Rental Exchange Initiative to get your rental payments included on your report. (This will help if you always pay on time).
- Sign up to Experian Boost so your council tax payments, regular savings and TV subscriptions contribute towards your credit score.
4. Paying for car insurance monthly
If you pay for your annual car insurance upfront as a lump sum, it won't show up on your credit report. But paying monthly could influence your credit score. This is because it is a form of credit. The insurance company is effectively allowing you to borrow from them and then pay them back in monthly instalments.
This can help you to build up a good credit history - if you make the repayments on time, every time. However, it’s normally cheaper to pay annually (if you can afford to do so), as you won’t be charged interest. If you’re eligible for a 0% credit card, you could consider using one to pay for your insurance annually, to get a cheaper insurance deal. Then you could pay the credit card back in instalments (before the 0% offer ends).
Remember, if you want to pay for your insurance on a monthly basis, your insurer is likely to carry out a ‘hard check’ on your credit report. They’ll want to check your payment history to see if you are a risk to lend to. This hard search will leave a footprint on your credit file.
5. Making multiple credit applications at once
Making multiple credit applications within a short space of time can reduce your credit score. Every time you apply for finance, the lender will run a ‘hard search’ on your credit report, which can cause a temporary dip in your score and leaves a footprint behind for other lenders to see.
If you’ve made lots of applications recently, it can show up as a red flag to lenders. It may give them the impression that you’re desperate for cash. They won’t want to lend to someone in financial difficulty, as it could make their situation any worse.
6. Not being on the electoral roll
You may wonder what registering to vote has got to do with your credit score. Well, just being on the electoral roll can add 50 points to your credit score. When you apply for credit, lenders use the information on there to check your identity and see if you have a stable address. Don’t worry, signing up doesn’t mean you have to participate in elections if you choose not to.
It only takes five minutes to sign up online on the government’s website. All you need to do is enter a few basic details about yourself, such as your name, address, nationality and national insurance number.
Read on for our 12-week plan to a better credit score.
Disclaimer: All information and links are correct at the time of publishing.
By Adele Kitchen
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