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Why your credit score matters for your family

SPONSORED: Consistently meeting your financial obligations can play a big role in setting up your future

Why your credit score matters for your family

Credit scores can influence a lot of major events within our lives, such as if we able to get onto the property ladder, if we are able to start a new business venture, or even apply for a new credit card – but what exactly is a credit score?

A credit score is an assessment used by financial institutions, such as banks, that is used to assess a client’s ability to manage their own credit, and how well they can be trusted to pay back the money loaned to them.

There are six major influences that affect your credit score:

Credit card utilisation

This factors determines how much you are using your credit card at any given time, and it’s calculated using a simple formula – the calculation of your balance divided by your open credit limit is equal to your credit card utilisation percentage.

This is a live process, meaning that past balances aren’t taken into account, as credit card lenders provide an up-to-date balance to credit providers.

Another important thing to remember is that it’s possible to bring forward completely paid balances as this will not affect your credit score negatively.

Percentage of on time payments

This factor is based on how often you make credit payments on time. For example, if you pay back the agreed amount on your credit card each month, every month, this will benefit you. However, if you miss even one payment then this can significantly damage your credit score and affect your chances of applying for credit.

Derogatory marks

Derogatory marks come in a variety of shapes and sizes in the forms of bankruptcy, collections, county court judgements, or property foreclosure. This factor is arguably the most damaging on this list as they show credit lenders of your past credit mis-management. To add insult to injury, these marks are usually taken into consideration on your credit score for up to 10 years and are rarely removed early. If you can avoid them, you should.

Average age of credit lines

This is determined by the age of all forms of credit an individual owns. The older your credit lines are, the better. This enables credit lenders to to assess your history more effectively as it gives them a greater period of time to monitor. You should generally keep older credit accounts open, as this will benefit your credit score more so than closing credit accounts and only having recent ones available to credit reports, as it may create a miscalculation of your past credit.

Total amount of credit accounts

This factor is pretty self explanatory – it looks at the quantity of credit lines an individual is using. The way this affects your credit score is that the more a person has the better, as it shows the amount of credit accounts you’ve been accepted for. Having a mix of instalment payments and revolving payments – which is a type of credit that can be used repeatedly up to a certain limit as long as the account is open and payments are made on time. However, credit lenders will not be fooled by multiple accounts opened at the same time in order to improve your score, and this factor is the least considered when looking at your credit score.

Hard credit inquiries

Hard credit inquiries occur when credit lenders look at your credit score for credit card, mortgages, personal loans, business loans and payday loans. These inquiries are ‘hard hitting’ as they can significantly damage your credit score but they do not stay more than a few months, unless you have a number of them active at once. These are not to be confused with soft credit inquires such as pre-approved credit offers from retailers – so don’t panic as these don’t affect your credit score. These inquiries are fairly common and as they are short-lived, it’s not a major factor to consider.

There are various credit-check services available – such as Experian, Noddle, or Clearscore – where you can check your credit score and see which are the factors that you might need to work on if you are thinking about applying for a loan or new credit card.

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