Credit Scores can be super confusing – ‘what is this magical number that makes banks like me or not?’. There can be many different things that contribute towards making up your credit score but the question is… is Investing one of them?
In short, your credit score is not impacted by investing. Even when investing on leverage – this does not count as credit and therefore doesn’t contribute to your credit score whatsoever. However, you can use money from investments to pay any credit you currently have which will help increase your credit score.
If you’re wondering what other ways you can try to boost your credit score, there are some things that you may not have known affect your credit score which could be the difference between you getting that mortgage or being declined.
Does my credit score impact my investments?
Let’s look at the flipside – we know that investing has zero impact on your credit score but can it be assumed that, therefore, your credit score has no impact on your investments?
Think about it – sure, if you’re a small investor who just wants to squirrel away some money into a promising looking index fund and a few bonds, you don’t need to worry about your credit score. However, when you’re looking for lending to enable an investment – a poor credit score can come round and bite you on the behind!
Within the UK, investing into property is usually a great idea because of the appreciation in value over time plus any rental income you generate in the meantime. Sounds like an amazing investment right? Well… only if you can afford it – which many of us average Joe’s cant.
To be able to purchase a property, many will need to seek out a ‘Buy-to-let’ mortgage. This specific mortgage allows you to buy a property with the sole intention of renting it out to earn money. With a sub-par credit score, you will either find it very hard to find a lender that will grant you the mortgage – or you’ll need to put down a substantial deposit.
Where can I find out my credit score?
This is the most important step when we’re discussing all things ‘credit score’. In order to determine whether you need to find ways to improve your score, you need to first find out what your score actually is!
The score that most credit score checkers call upon is called FICO. It actually advertises that ‘90 of the top 100 largest US lending institutions’ rely upon their scoring system to assess creditworthiness of applicants.
You can easily find this out through searching ‘credit score checker’ on Google. The first result that isn’t an ‘Ad’ is Experian. This is who I personally use to monitor my credit score and they don’t require you to answer a million questions just to get what you’re looking for. (They also use the FICO credit scoring system).
However, if you’d prefer to use a different credit score checker, there are lots of other popular ones out there like:
- Clearscore; and
- Equifax.
When using these credit score checkers, I’d definitely recommend using a couple of checkers. The purpose of this is to ensure you are working with an accurate figure and avoid any unneeded heart-attacks.
What is a good credit score to have?
Judging by what I’ve read from an article published by Experian, you can use the following ranges to determine how good or bad your credit score is:
- OK/Average – 721 to 880;
- Good – 881 to 960; and
- Very Good – 961 to 999.
However it is definitely worth noting that what one business would deem to be a good credit score, may differ from other businesses so it’s really important to take the time to do some research depending on the lender and what you’re actually trying to achieve.
Should you be below the OK/Average threshold of 721 – there’s no need to worry. You can easily bring this up with a few smart decisions which I’ll explain now.
How can I improve my credit score?
There are 5 key areas that are assessed when calculating your credit score. These areas hold different weightings – there is not a simple 20% split between the areas.
Payment History
Payment history accounts for the majority of what makes up your credit score, standing at 35% of your overall score.
This is understandable as Payment History refers to any payments you made against credit you have been granted so potential lenders will always want to check that you’ve never defaulted on any payments before.
The best way to improve your payment history is super obvious. Just build up a great history of never missing a payment! There aren’t any shortcuts that can be taken here unfortunately.
Amounts Owed
Amounts Owed accounts for 30% of your overall credit score and refers to your credit usage. Your credit usage is represented as a ratio called the ‘credit utilisation’ ratio. This is calculated by dividing the total revolving credit you are currently using, by the total of all your revolving credit limits.
In simple terms, it essentially gives an idea of how reliant you are on credit versus cash you have in the bank.
The best way to keep this as strong as possible is to ensure you are not using more than 30% (as a rough estimate) of the available credit you have been granted.
Credit History Length
Credit History Length only makes up 15% of your FICO score but this should not be overlooked as keeping this as high as possible will still contribute to a juicy credit score!
Credit history just looks at the average ages of all of your credit accounts. Credit accounts include any cars on finance, mortgages, smaller loans – even mobile phone contracts!
Getting a phone contract out in your child’s name (even if you’re paying the bill) will definitely help them establish a strong credit history length and put them in good stead when they are looking at their credit score.
Credit Mix
Credit Mix refers to how diverse your ‘credit portfolio’ is. It sounds fancier than it really is – essentially, how many different types of credit you have. An example would be having memberships (like the gym), loans, contracts (like a phone or internet), credit cards and that sort of thing.
This only makes up 10% of your score so it’s not the be all and end all if you’ve only got a few set up.
New Credit
This is exactly what it says on the tin. New Credit refers to lines of credit that you have opened up recently and the number of hard inquiries you’ve had.
Hard inquiries are official credit score checks that lenders have made – too many of these may reduce your credit score. But don’t worry, if you’re going in and regularly checking your credit score using sites like Experian, these are soft inquiries and have no impact on your score at all.
How long does it take for my credit score to improve?
So now you’ve been through and taken action to try and improve your credit score – how long will it take to update?
Typically, your credit reports are automatically updated between 30 days (monthly) and 45 days and it will take into account all of the changes in your credit. This will include new lines added, payments you’ve made and current outstanding balances.
So what have we learned?
To summarise this post into one neat little paragraph, we now know the following:
- Investing has no impact on your credit rating. However, your credit rating can impact your investing;
- You can check your credit score simply by searching Google for a ‘credit score checker;
- Aiming for a score of 881 will represent a good credit score;
- Your credit score is made up of five key areas and each area has a different weighting when it comes to assessing the overall score; and
- Credit scores are updated every 30 to 45 days and take into consideration all changes in your lines of credit such as payments made and movement in outstanding balances.