How are credit scores calculated?

If you’ve read up a little on credit scores, you’re no doubt familiar with the three key credit reference agencies: Experian, Equifax, and TransUnion. These three companies collect and compile information about your use of credit so they can quickly calculate your score.

But given how important your credit rating is when it comes to applying for things such as car finance, you may be curious to know how a credit score is calculated. So, if you’re looking to improve your credit score, here’s everything you need to know about how they’re calculated. 

Understanding how a credit score is calculated

When it comes to calculating credit scores, there are five key areas that credit reference agencies refer to and evaluate:

• Payment history
• How much credit you owe
• The length of your credit history
• The types of accounts you own
• Your recent credit activity

While all of these aspects are important when evaluating your credit profile, some may contribute more heavily than others when having your credit score calculated.

1. Your payment history

One of the biggest contributing factors to how a credit score is calculated is your payment history of previous credit products.

Your payment history shows how you’ve handled credit in the past, including whether you’ve missed payments, how often missed payments have occurred, how overdue certain missed payments are, and how recently these payments have been missed.

Naturally, the higher the number of missed payments, the bigger the impact it will have on your credit score calculation.

2. How much credit you owe

Credit owed is based on the entire amount of credit you currently have access to, the number and types of accounts you own, the money you owe compared to your available credit, and how well you’ve managed your use of credit.

Owing a substantial amount of credit on loans is not necessarily a bad thing, provided you have a good history of making repayments. However, high credit usage and maxing out credit cards is considered a sign of financial instability and over-reliance of credit, which can contribute to a lower score.

3. The length of your credit history

When it comes to how to calculate a credit score, the length of your credit history is not something you can actively change.

Your credit history is based on the average period of total used and repaid credit. Typically, the longer your credit history the better, so be sure to make regular payments on time, and it can be helpful to keep all but the most unnecessary accounts open to enhance your profile.

4. The types of accounts you have

Credit reference agencies prefer to see you handling a variety of different account types and loans over the course of your credit history. This displays your ability to correctly handle different types of credit.

5. Your recent credit activity

Last, but by no means least, we have your most recent credit activity. Looking at your most recent activity will give credit reference agencies an insight into your current financial situation.

Opening lots of new accounts or making several applications in quick succession may indicate financial instability, which is why continual evidence of meeting new payments on time and regularly spaced-out credit applications are important for a higher score.

How often is your credit score calculated?

Generally speaking, credit scores are calculated every 30 to 40 days, when new information is added to your account, or whenever your score is checked by yourself or a lender.

So, provided you can address missed payments before the month ends, there is a good chance you can minimise the negative impact they will have on your next credit score calculation.

With these points covered, you should now have a good understanding of how credit scores are calculated and where it’s most important to focus your efforts when trying to improve your score.

Of course, improving your credit score will take time, but having a low rating shouldn’t impact your ability to make big purchases on finance.

At Zuto, we specialise in bad credit car finance, helping you to find the best repayment plan to suit your financial needs. Contact us today or get even more help and advice from our team of finance experts.