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Credit rating affects how much (if any) money you can borrow from banks, online lenders, and your ability to get quick loans. But how is it calculated?
In the UK, the Financial Conduct Authority (FCA) and Information Commissioner’s Office (ICO) regulate credit rating. These are both government organizations which make sure that your credit score is calculated using the same information regardless if you’re using an online lender, a bank, or any other source of credit – though your credit rating can differ between each institution. Lenders determine your credit rating by looking at a credit report, which includes many different aspects of your credit history. Here are the ones that have the largest impact on your credit rating:
A big predictor of future success is past success, so naturally if you’ve borrowed money and paid it back on time in the past your credit rating goes up and financial institutions are more likely to allow you to borrow money (and to borrow more of it) in the future. Paying off your loans past their due date has a negative impact on your credit rating, and it has an even worse impact if the loans are sent to debt collectors.
The length of time you’ve been using credit accounts impacts your credit rating. The longer an account has been open, the better it is for your credit rating. Firstly, more positive credit history is seen as better than less, and secondly just having accounts that have been open for longer increases your credit rating. Not having much of a history with credit accounts means you don’t get these bonuses to your credit rating, bringing it down.
Your credit rating is partially based on how much of your available credit you use. If you have a credit limit of £5000 but only use £1000 at a time, your credit rating will increase and financial institutions are more likely to raise your credit limit. The more you spend of your available credit, the slower your credit rating will rise.
These three things are public record, and as such they can be found on a credit report and negatively impact your credit rating, reducing your ability to borrow money. These are usually removed from your credit report after six years.
When an agency is calculating your credit score using a credit report, the following information is not included: medical history, political affiliation, criminal record, or religion. Everything else that’s part of the public record can be considered fair game.
If you want to get quick loans, borrow money from banks or online lenders, or increase the amount of money you can borrow, credit rating is important. Knowing how it’s calculated is the first step to financial freedom, and the next step is learning how to improve your credit rating.