10 September, 2020
When applying for any kind of credit, whether it be a loan or a mortgage, the lender will use your credit score and credit history to determine whether they accept your application and what kind of interest they are going to charge you if you are accepted.
In theory, the higher your credit score, the better chances you’ll have of being accepted and you will be charged lower interest rates.
1 Applying for credit
Every time you apply for credit, the lender will request your credit report which will be recorded on your credit file as a hard enquiry. If you have applied for a lot of credit in a short period of time, each lender you apply with will be able to see the amount of hard enquiries on your report which will indicate to them that you’re in a bad financial situation and a higher risk or that a lot of lenders are rejecting your applications for credit. Enquiries show on your credit report for 2 years. Checking your own credit does not affect your credit score.
2 Address History
Lenders will look at your address history and if you’re on the electoral roll to determine if you are reliable and stable. Living at the same address for a long period of time gives the impression of stability and being on the electoral roll helps to ensure that you are who you say you are.
3 Age of accounts/Length of credit history
Having an open credit account for several years also proves to lenders that you are stable. It shows potential lenders that you have been trusted by other lenders to have a credit account for a long time. The age of your accounts makes up 15% of your overall credit score.
4 Payment history
Your payment history is the most important factor in your credit score as it makes up 35% of your overall score. A missed payment negatively affects your score but defaulting affects it even more. When you miss multiple payments, the lender will put your account into ‘default’. Every lender is different so the amount of payments you can miss before you default will differ from lender to lender. Missing payments and defaults stay on your credit report for 6 years.
5 How much credit you’re using
The amount of credit you’re using (credit utilisation) makes up 30% of your credit score. Using more than 30% of your total credit negatively affects your credit score.
To summarise, try not to apply for multiple lines of credit in a short amount of time, keep at least one of your credit accounts open for several years, make sure you make all of your payments on time and try to keep your spending under 30%.
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Editorial Disclaimer: This article was updated 18.10.2021.
Opinions expressed here are the author's alone, and not those of any bank, credit card issuer or any other company. This article has not been reviewed, approved or otherwise endorsed by any of these organisations.
NB: The information on this page does not constitute financial advice, please do your own research to ensure that the product / service is right for your individual circumstances