Why is my credit score low when I pay all my bills on time?
If you find you are being refused credit or are only being offered credit with a high interest rate the reason is probably because your credit score is low. The common perception is that if you pay all your bills on time, you will have a good credit score. However, this is generally incorrect.
Even if you do pay your all your bills on time and have never made a late payment or have never missed one, you can still have a low credit rating.
This is because your credit score is made up of lots of different factors that affect your overall score, such as your profile. Your ‘profile’ is things like marital status, your employment, and your age.
Other factors include whether you have a bank account or a savings account. Probably the most important factor is your financial history.
In the most part, if you have only just started off on the ‘credit ladder’ and therefore have very little financial history to show, then your credit score will be low.
Financial histories give lenders a feel for what type of risk you are and the sort of lifestyle you lead. They can see your spending habits (eg do pay off your credit cards in full every month or do you just pay the minimum?). They can see whether you are the sort of person who pays all their bills or time or the type that makes late payments or misses them.
By looking at your profile and financial history, lenders can then calculate a credit score for you. Each lender has their own credit scoring system but they all do score similarly. It is just that some lenders will offer credit to people with lesser credit scores.
Research shows that the age that most people have a good enough financial history is 46! So, for someone who has just started work and has had very little credit, they have a lot of catching up to do!
It should also be noted that there are two different types of credit scores – the one calculated by a loan company and the one calculated by the credit reference agency. You may say “I have been refused credit by a loan company but my credit reference agency has scored me as 500 points which is a good credit score. I don’t understand”.
However, while lenders take everything in to the equation from your profile to financial history, credit reference agencies do not. They focus only your credit history (credit cards, unsecured loans, mobile phone bills etc) and not your lifestyle.