How Is Your Credit Score Determined

Updated: December 19, 2023 Author:

Quick Answer: Your credit score is a concise way to represent your creditworthiness. Determined by credit agencies, this figure reflects your credit history, repayment consistency, and credit utilisation, among many other factors.

    A credit score is a brutally concise way of summarising an individual’s financial profile. Sometimes controversially, a credit score can be damaged by one mistake or hiccup, such as a late repayment.

    Credit scores are usually between 300 and 850; the higher the number, the more creditworthy an individual is perceived to be. In other words, it’s a reflection of their risk. There are a few apps to check your score, though there isn’t just one credit agency, with some examples being Experian, Equifax, and TransUnion.

    The exact way it’s calculated isn’t always clear, but an algorithm is used to arrive at a number by taking into consideration various factors.  

    Primary Factors Influencing Your Credit Score

    Some factors are more important than others, so here is a list of the most important ones:

    1. Credit History & Repayments: Perhaps the most significant factor is your credit history, which is a ledger of the types of credit you’ve used and the repayment history. Often those that have used more credit, for longer, can prove to have a stronger credit history. In other words, the “default” credit score when becoming an adult isn’t a particularly strong one.
    2. Credit Utilisation: This is the ratio of the amount of credit you’re using compared to the total credit available to you. If this is above 50%, or even 30%, it can sometimes indicate that you’re overly reliant on credit.
    3. Types of Credit Used: A mix of credit types (i.e. mortgages, credit cards, personal loans etc.) can reflect positively, compared to someone who overuses just payday loans.
    4. Recent Credit Enquiries: When you apply for credit, a hard enquiry is made. If lots of inquiries are made in a short space of time, this could be a red flag.

    Surprising Factors That Impact Your Credit Score

    Whilst the above factors are the main ones, here are some less talked about factors with varying levels of influence. However, there are many more.

    1. Electoral Roll Register: Registration provides proof of residence, which credit agencies see as a sign of stability. If you’re not registered, this quick process can provide a credit score boost.
    2. Associations: Who you are linked financially to can impact your credit score. For example, those who you hold a joint bank account with.
    3. Rental Payments: Whilst not always the case, rental payments can sometimes influence credit scores, especially when proactively using services like Experian’s Rental Exchange Scheme.
    4. Utility Bills: Mobile phone contracts are a form of credit, and therefore the repayments reflect on your credit score. The same sometimes goes for utility bills, too, though this remains a new area of credit scoring.

    Final Thoughts on How Your Credit Score Is Determined

    Fairly or unfairly, most of your financial activity boils down to a single three-digit number. Whilst credit scores aren’t wholly transparent, we have a pretty good idea of their main influences. Credit scores shouldn’t be viewed as a policing force, but rather a tool we can proactively work on to improve the availability and cost of credit in the future.