our credit score determines significant parts of your finances, including what type of interest rate you get on loans and credit cards and whether you even qualify for a credit product. Before you can raise or build your score, you’ll need to understand how it all works.
A credit bureau sets your score using information found on your credit report, which is on file with the bureau. If you haven’t already, you should go over your reports for accuracy. You’ll find information about credit reporting at MoneySupermarket and other financial websites if you’re not familiar with reading a credit report.
Every time you apply for credit or are denied credit, an entry is made on your report. If you get credit, the creditor reports the new account on your credit report.
During the entire time you have an account, the creditor will put information about it on your report, including whether you pay on time, how much credit you’ve used and what your balance is. If you don’t pay and the creditor has to place it with a collection agency, that is noted on your report too.
Credit scores range from 300 to 900. The higher your score, the better you look to potential creditors. On average, people usually have scores of 600 to 700.
Your score is calculated by a formula used by the credit bureau. The values used in the formula come from your credit report data. The most significant figures are delinquent accounts, how you use credit, how old your credit file is, how often you apply for credit and what type of credit products you have.
Delinquent accounts lower your score. The scoring model assumes that if you’re paying late or not paying now, you’ll continue to do so.
How you use credit and how often you apply for it is a factor because you need to show responsibility with credit to have a good score. If you’re frequently maxing out cards or opening accounts, you’re an increased credit risk under the scoring model.
The age of your credit file affects your score because the model assumes people who have had credit longer are less of a risk than people just getting credit. Having no credit history can be almost as harmful to your score as having a poor credit history.
If you have the same type of credit product on your report, such as credit cards and nothing else, you’re considered unproven with other credit types. You need a mix of credit, such as credit cards and a mortgage or auto loan, to get a higher score.