Any potential lenders may use your credit score to assess how likely you will repay before deciding if they will lend you any credit. There are three leading credit reference bureaus, Equifax, Experian, and TransUnion that hold information for lenders to view about you and enable them to make their decision.
Each of the credit reference bureaus will score you differently; therefore, you will not have the same score from each of them. As a rule, the companies will look at your debt level, how consistently you have repaid it, and whether there are missing repayments. But each bureau may look at different data than the other, hence the differing scores.
Financial institutions can view a raft of information in your credit file. This can include:
- Current debt level
- Bills paid consistently on time
- Any missed repayments and when they were missed
- Repeated applications for credit in a short space of time
- Length of credit history
The criteria that lenders look at varies between each lender, as types of credit vary, such as banks, mortgages, credit cards or auto loans, etc.
Lenders also look for affordability, so they will likely request your income and expenditures to check that you can afford to repay the credit.
Your credit score depicts what is in your credit report. Your credit score is viewed as a number, and scores can range from 300 to 850. There are many factors in your credit report that contribute to your score, and the higher your score, the better chance you have of being accepted for lines of credit. The lower your score means you may have difficulty getting credit or getting good terms on your loan, such as a lower interest rate.
What makes for a good credit score?
- Pay your bills on time, every time.
- Pay any credit card balance in full each month.
- Utilizing less than 50%, or even 30%, of your available credit (e.g., if you have a credit card with a limit of $10,000 but you owe only $2,000, you are only using 20% of your limit)
- Paying any debts off as soon as possible
- Keep a credit card with a zero balance open, even if you owe a small amount on another. If you close the account, it lowers your overall credit limit. For example, if you have two credit cards with a total limit of $5,000 each ($10,000 total) and you owe $5,000, you are only using 50% of your total credit limit. If you close one account, that now leaves you with a total credit limit of $5,000, and now you are using 100% of your total limit.
- A long and well-managed credit history
- Utilizing different types of credit such as a credit card (revolving credit), installment loans, a mortgage, etc. to show you manage your finance well
What affects your score negatively?
- Consistently missing bill payments when they’re due
- Applying to a lot of different lenders in a short space of time, making you look desperate
- A short credit history
- Not having had any credit and therefore no credit history available for lenders to decide if you are likely to repay them.
- Any mistakes on your report will work against you, so be sure to check your report regularly and contact the lender or CRA if any changes are suspicious.
Positive information can stay on your report for up to 10 years. Credit card accounts etc. (aka revolving credit) will be on your credit report for as long as the account is open, which, when well managed, improves your credit score.
Negative information, such as bankruptcy, may stay on your report for as long as ten years. Other types of negative information may be on your record for up to 7 years.
As a rule, your repayment history is what lenders and creditors will look at to see how well you manage your finances. They can see if you pay on time consistently or if you have missed any repayments and how often this occurs.
You are entitled to a free credit report once per year. If you applied to one of the three bureaus every four months throughout the year, that means you will get three reports a year. You will be able to view what is on record about you by all of them. You can get your annual credit report here at Annual Credit Report.com.
Keeping a close eye on your reports can help build an understanding of your score and check that it is accurate and up to date.