For an individual to be creditworthy having a good credit score is critical. The credit score is evaluated based on your credit history. The better the score the more lenders will feel comfortable issuing credit. The credit score is calculated by credit reference agencies with three operating in the UK -TransUnion, Equifax and Experian.
When calculating the credit score, credit reference agencies evaluate the following factors:
The length of credit history
For those that have a long credit history there is more data available for lenders to judge the risk factors. Those individuals that have lengthy credit histories and have paid on time will have higher credit scores. People with relatively new credit histories are more unlikely to be considered by a lender as trustworthy enough especially for large sums of credit.
History of payments
The primary concern of any lender is the repayment of debt on time. For this, they check the payment history of the individual applying for credit. Creating a consistent payment history by paying regularly is essential. Using a credit card periodically can benefit as it helps to build the credit history. Contrastingly, not taking loans or not using a credit card will not build a strong credit history and it will not help to grab the best interest offers or other deals available to those with a positive credit history.
Hard credit vs soft credit search
Each time you apply for fresh credit or look to increase the limit it can impact the score. Using a comparison site to compare credit from different lenders within 45-days will show as a single search. Hard searches lead to the credit score dipping by up to 5-points and remaining on the report for around 2 years. Soft searches on the other hand do not impact credit scores.
Usage of credit
The amount of credit used is also taken into account by lenders. Using less than half the available preferably 30-40% is considered ideal. The lesser the percentage of credit used the more interested will lenders be to give loans as it shows the individual uses their credit judiciously. It raises the creditworthiness of a user.
Kind of credit
The more the different types of credits in use e.g., mortgages, revolving credit, personal loans etc. and paying on time will result in higher credit scores. This boosts the creditworthiness of the borrower.
Lenders take all of these factors into account when deciding to extend credit. When an individual applies for a line of credit, the lender has to ensure that the person is creditworthy to extend the line of credit. It is just not the overall credit score that they will look into but also consider factors like spending and income.
For this, they need not necessarily depend on the credit report and score from a single agency but may also decide to look at the information available with the other two agencies also. Each lender has their unique criteria to be met before they decide to extend a loan to an applicant.