Credit scoring explained

Many of you have heard about credit scoring but are not 100% sure what to do with it. Given the significance it plays in your financial life, understanding the basics is crucial. Check out the below for a thorough explanation of what it is, the factors that affect your score and how to get yours.

What is a credit score?

Your credit score is a three-digit number used to determine your credit worthiness. The number along with your credit report is used by lenders and banks in determining how risky you are – the higher the number, the lower the risk; the lower the number, the riskier you are deemed. This number and your report are used when you apply for credit, for example when applying for a bank account, mortgage, or a loan.

Your credit report holds information about you and is usually requested by the credit lender you are applying to. It includes your personal information, credit account history, credit inquiries and public records.

Having an excellent credit score will directly impact the amount of credit you are offered, the interest rate and the range of options you will have. 

What affects your credit score?

Your credit score is calculated based on the information held about you. There are five main areas that impact your score:

Payment history

This makes up approximately 35% of your score – the largest factor. Your score considers your ability to pay on time and how often you miss payments. 

How much you owe

This makes up 30% of your score, and considers the amount of credit you owe, how many accounts you have, and the proportion of money owed compared to how much credit you have available.

Credit history length

Making up 15% is how long you have had credit for. The longer the better, as it shows a long history of having credit and managing your money. 

New credit

10% of your score is determined by how many new credit lines you have. Similar to above, the fewer the better – older longer credit lines are preferred to new shorter lines. Applying for a lot of new credit signals financial trouble and is seen as negative. 

Types of credit you have

The final 10% is based on the type of credit you have – a combination is preferred. This will be either instalment (loans and mortgages where regular payments are made until the debt is clear) or revolving credit cards (where money is borrowed used and repaid to be used againagain).

How to check your profile

Your credit profile can be accessed across three Credit Referencing Agencies (CRAs): Equifax, Experian, and TransUnion. You can review your profile and check your score for free and should do so regularly. You can also access a copy of your credit report and check the information held about you. These are available to download, usually for a fee, but many offer free copies for a limited time.

We want an excellent score. Below is a summary of what that means for each:

Experian – 961-999

Equifax – 466-700

TransUnion – 628-710

The CRAs will update your score on a monthly basis, reflecting your credit activity during the month.

Key tips

  • Your score alone is not enough for credit application success. Your credit report will be requested by your lender, and will be used to see detailed information about your credit activity. So, when possible, check your record in detail and fix where necessary.
  • Before applying for new credit, check your credit eligibility to see the likelihood of you being accepted. This is a soft check so does not appear on your file (only hard checks do, for example when you submit the credit application).

Get started today, by checking your credit profile and make sure the information held about you is correct. To start improving your credit score, check out the article here, which takes you through the things you can do immediately to improve.

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