What Makes Up Your Credit Score?
If you want to know which debts you should pay off first to improve your credit score, it helps to first understand what factors influence your score.
Your credit score is rank given to you by a credit reference agency, based on information reported to them by your creditors. There are three main credit reference agencies in the UK, Experian, Equifax and TransUnion.
Each of them calculates your score in a slightly different way, but right across the board, there are five factors that go into the mix when working out your score: your payment history, level of debt, age of accounts, types of credit and inquiries on your credit file.
Each category is given a different weighting, so certain things will affect your score more than others. The credit agencies all weight these categories slightly differently, but the largest and most commonly-used agency in the UK weight them like this:
- Payment history – 35%
- Debt utilisation and outstanding debt – 30%
- Age of credit accounts -15%
- Types of credit – 10%
Because of this system, the order that you need to pay things off to improve your credit score is affected by the characteristics of the account and the debt, not the account type.
Which Debts Should You Tackle First?
If you are trying to improve your credit score, you might want to strategize to tackle the debts which are having the most pronounced negative effect on your credit score first.
You should always make sure that you pay the minimum monthly payments on all of your debts first/ Missed payments have a major effect on your credit score, so missing out on one debt to pay off another will only undo your efforts to improve your score.
In addition, you should always take care of priority debts first, as falling into arrears on these can have immediate and serious consequences. You can read more about how to classify priority and non-priority debts below.
Once you have made all your monthly minimum payments, you can work to improve your credit score by overpaying on the accounts which are most likely to have the greatest effect on your credit score:
1 – Accounts With the Most Arrears
Your payment history has the single greatest effect on your credit score, accounting for 35% of the total. As a result, just one missed payment is enough to knock points off your score, and if you stay in arrears, your score is likely to plummet.
For this reason, if you have accounts which are in arrears, getting back up to date with these should be a priority. If you can’t afford to pay off everything you owe at once, put as much as you can afford towards reducing your arrears. Likewise, if you’re behind on several accounts, you should take care of the one which you are most behind with first.
If any of these are priority debts, they skip the queue- it is really important to pay these off ahead of anything else, or you could land yourself in serious financial trouble.
2 – Accounts Which Are Maxxed Out
After your payment history, the next most important factor to your credit score is how much debt you have access to and how much of it you are using. Creditors call this your ‘debt utilization ratio’. For example, if you hold a credit card with a £1000 limit, and have spent £800 of it, your debt utilization ration would be 80%.
If you have a high debt utilization ratio, this is taken as a sign that you cannot afford to repay the debt you already hold, which means that there is a risk you could be overburdened by any more lending.
As a result, being maxed out on your credit cards or overdrafts, or holding large amounts of personal debt, has a negative effect on your overall credit rating.
Ideally, you should aim not to use more than 30% of your credit limit at any one time. By making payments towards credit accounts which are close to their limit, you will reduce your debt utilization ratio and start to improve your score.
3 – High-Interest Loans
If a loan has a very high-interest rate, it increases the size of your monthly payments and takes you longer to reduce the balance on your loan. For this reason, it can take a long time to improve your debt utilization ratio if you hold a high-interest loan.
By paying more than the monthly minimum on these debts, you can start to reduce the balance more quickly and improve your debt utilization ratio, which accounts for 30% of your overall credit score.
Priority v. Non-Priority Debts
Whenever you budget for your debts, you should always make sure that you take care of priority accounts first. These are debts for which there are serious consequences if you fall behind on payments. Examples of priority debt are mortgage, rent, council tax and any debt secured on essential belongings, such as a logbook loan.
If you fail to pay these debts on time, you can quickly find yourself facing a range of serious consequences, ranging from eviction, to being cut off from essential services, repossession of your belongings or legal action.
Non-priority debts still come with consequences if you don’t keep up with payments, but it may take longer for the creditor to take action and there are more chances for you to make things right before you’ll face serious consequences.
Non-priority debts include credit cards, overdrafts, personal loans, store cards, payday loans and other forms of unsecured debt.
|Priority Debts||Non-priority Debts|
|Money owed to HMRC||Credit Cards|
|Council Tax||Personal Loans|
|Logbook Loans||Water Bills|
|Homeowners Loan||Bank Loans|
|Gas & Electricity Bills||Catalogue Debt|
|Money owed to a government department (e.g. DWP)||Money borrowed from friends or relatives|
|Hire purchase agreements (on essential items such as a car used for commuting)|
Should I Close My Accounts After Paying Off My Debts?
After you have paid off your debts, you may wish to close your accounts. However, it could be beneficial to leave some revolving accounts open, if you can resist the temptation to spend on them. This relates back to your debt utilization ratio, which accounts for 30% of your credit score.
If you have access to credit through credit cards and overdrafts but do not use them on a regular basis, it demonstrates that you are able to manage your finances without resorting to debt, which is reassuring to lenders and can boost your credit score.
In addition to this, having older accounts on your file increases the average account age, which accounts for 15% of your score.
It also means that if you need access to credit in future, you may not need to apply from scratch. Fresh inquiries on your credit file may harm your score, so you can help protect it by avoiding them where possible.
Finally, keeping a variety of accounts open shows that you can manage credit from a diversity of sources, which can also help to boost your score.
How Can Love Debt Free Help?
Here at Love Debt Free, we have partnered with some of the UK’s leading Debt help companies.
They have already helped thousands of people reduce and manage their debts, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these debt help companies, click on the below and answer the questions.